I originally started writing this post with the intention of reporting on a top ten list of "most troubled banks." A group called Research Associates of America prepared this list, using a variation of something known as the "Texas ratio" to analyze the banks. And media outlets like ABC News have run with this list, splashing it on their website with a dire-sounding headline.
Sounds good, right? Makes for nifty headlines for the media. Helps warn consumers. But as soon as I started reading, I had to ask myself... The what list? Prepared by whom? Using what data?
I started looking around and found that the organization that put out this list of "troubled banks" is the FAST-RAA, a non-profit labor research organization that has strong ties to labor unions. What expertise does this organization have in the banking industry? Why has the media accepted its numbers and reported on the group without any apparent investigation? What is the organization's interest in providing negative information on banks?
I then looked at the "Texas ratio" that was used to create this list. The ratio is supposed to be computed by comparing a bank's assets and reserves to its non-performing loans. ABC news reports that organizations currently creating these lists of banks in trouble are using "variations" of the Texas ratio, but they don't say what those variations are. How are users of the data even supposed to analyze its reliability?
Further, the use of the Texas ratio or a variant of it doesn't tell the whole story. It relies on historical information obtained from the FDIC, but today's reality for a bank could be different from what was reported just a few months ago. The ratio also looks only at a very narrow set of numbers, and there are many other factors involved in a bank's financial picture, including collateral that the bank has rights to and certain reserves that are excluded from the calculation.
I'm not even including the list here, because I think it's an unfair way to single out a small number of banks, with very little information available on the reliability of the numbers used to compile the list. Something like this has the potential to do far more harm than good.
Banks get in trouble when depositors make a quick run for their money and start withdrawing cash rapidly because they're scared of a potential failure. What happens if this list starts a run on a bank? We have a self-fulfilling prophecy because of media scare tactics. That's what I call irresponsible reporting.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
Take the first steps to building your portfolio.View Course »