Friday, August 22, 2014

Europe Fears Banks Lack Cash Cushion to Cover Bad Loans

Some analysts are looking back to the collapse of banks in Texas due to faulty real estate loans, and conclude that based on the "Texas ratio" Eurozone banks need additional cash.


Fri., August 22, 2014
As Europe slogs through its latest round of bank stress tests, a growing number of analysts have already reached their own conclusion: Eurozone banks need additional cash, the International New York Times reported. To buttress their case, some analysts have dusted off an obscure American bank metric that highlights the extent to which Europe’s increasing number of nonperforming loans is threatening to overwhelm existing bank cushions. The measure, called the Texas ratio, was developed by an analyst who covered troubled United States banks during the late 1980s and early 1990s. During that period, numerous Texas-based financial institutions collapsed under the weight of faulty real estate loans. Part of what has made the Texas ratio attractive to analysts and regulators is its simplicity. When the ratio of bad loans to equity and cash set aside exceeds 100 percent, it suggests that the bank is either ready to fail or is in desperate need of new capital — as was the case with Texas banks in the 1980s. “We found it to be a very good guide telling you which banks would fail,” said Gerard S. Cassidy, the bank analyst who introduced the formula and coined the name. “It’s a ratio that everyone can understand.” Now as the European Central Bank prepares to become the primary bank regulator in the eurozone, the extent to which lenders in troubled economies like Spain, Italy, Portugal and Greece have sufficient cash to protect against ever-rising bad loans has emerged as a crucial question for investors, banks and regulators. 

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