Did you know there is a ratio by which the default of banks can be predicted? This ratio is being pointed to as the predictor to the collapse of Indy Mac Bank because of its Texas ratio.
This system was developed by Gerard Cassidy and some co-workers at RBC Capital Markets, they conceived that by dividing the value of the lender's non-performing loans by the sum of its tangible equity capital and loan loss reserves gives a measurable ratio.
While analyzing Texas banks during the early 1980s recession, Cassidy found that banks tended to fail when this ratio reached 100% or higher.
There was a similar pattern among New England banks during the recession of the early 1990s.
The Texas ratio for Indy Mac bank was reported as 140% and pointed to as the reason for the failure, yet the same people making these claims fail to mention the banks that have ratios in the 200 to 300% range yet still in business.
Was Indy Mac in trouble? Maybe yes, maybe no, did it help that a New York Senator leaked a letter to the press about his concerns that Indy Mac was in trouble.
Why would a New York Senator be concerned about an California bank? In an election year it should not be hard to factor.
That letter caused a run on the bank and the attempts of Indy Mac to gain a loan to make themselves more solvent was thwarted by the good senator's actions.
So do we trust the Texas ratio or is it another Canadian bankers numbers game that really doesn't take into account the actual banks business and tries to over simplify a way to make predictions in matters that really can't be measured by a simple ratio.
Bank failures are on the rise and many people feel they can not trust their money with the banks.
Remember banking laws are such that your bank does not have to keep but 10% of its assets in reserve.
If you run down and withdrawal your savings, CDs, and other investments because of rumors and innuendo of some power hungry politician you'll be playing right into their arm.
The fact is most banks will not be able to pay you that day if your asking for a significant amount of money, the days of thousands of dollars in bank vaults is a thing of the past.
If the withdrawals are greater then 10% of the banks assets because the word leaks out and hundreds of bank customers like you go running down to the bank for their money, the bank will have to borrow the funds to pay you back (if they are able), this will cause their Texas ratio to climb and the sky is falling crowd will feel vindicated their system works.
Banks can not liquidate their investments like you can by heading to where they placed their money and ask for it back right now to pay you.
Our banking system is built on trust, we trust the bank will have our money when we go and ask for it back.
We trust the bank will pay us interest on the money we invest with it.
But banks are a business like any other, run by people.
Some smarter some not, do they make mistakes? Of course they do.
All that means is you as a consumer must do your due diligence.
It is your responsibility to make sure you know where you are parking your money, you are the first line of defense for your money.
Here is what I would recommend.
The basic rule for individual accounts is that FDIC insurance covers up to a maximum $100,000 per depositor per bank.
One way to guard larger sums is to hold accounts under $100,000 at a few separate banks, remembering that accumulating interest could push an account over the limit jeopardizing the amount above the 100,000.
There are other products, so diversify your money, take a serious look at guaranteed investment vehicles like indexed UL's or believe it or not real estate.
Remember buy low sell high.
Now it's a buyers market and finding great deals is very easy.
Return on investment can be significantly higher and much more secure now that prices have fallen.
Finding homes in locations where rents are steady and there is an abundance of renters since most have lost their homes, they need to rent.
Finding ways that make sense in times like this is tricky but with right guidance and without panicking it should not be a problem for you.