A.M. Best Sees Rise in Bank Failures

October 5, 2009

A significant rise in bank failures may be just ahead, based on research from A.M. Best Co. showing a large number of U.S.
commercial banking institutions that could be categorized as troubled institutions.

This research runs publicly available regulatory data for first half 2009 through A.M. Best’s proprietary model, focusing on various key ratios and ranking individual commercial banks based on the combined outcome.

Among the findings:

These 505 troubled banks shared some common characteristics in terms of ratios such as the Texas ratio, which provides greater clarity on equity capital to problem loans and averaged 134.8%, versus the industry average of 43.4%.

As troubled banks experience higher levels of problem loans, the level of reserves becomes less adequate; their average level of reserves to nonaccrual loans stood at 0.35 times, compared with the industry’s average of 4.9 times.

The 58 failed commercial banks since March 2009 are geographically diverse, based in 22 different states, but Georgia had the most failures in this period with 13, followed by Illinois with 11.

The current difficult economic environment could further increase the number of troubled banks, according to A.M. Best’s list.

Source: A.M. Best Co.

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