The Cottage Business of One-Upping the FDIC

If you want to know how many “problem” banks there are in the US, you can ask the FDIC and the regulator will tell you that 880 banks are in trouble — as of the end of last September.

But if you want to know how many banks are facing extinction as of today, you’ll have to refer to a cottage industry that offers up what they claim to be up-to-date numbers. How? By reverse engineering the FDIC’s famous CAMEL ratings. The ratings measure capital adequacy, asset quality, management, earnings and liquidity, and they run from one to five, with a one being the score for the strongest banks.

I count at least three entities that offer such reverse engineering: Institutional Risk Analytics, Money Economics and the Calculated Risk blog.

We’ll start with Calculated Risk. The blog, which is largely known for hysterically writing about the impending boom of the US economy and banking system, only to see said economy and banking system IMPLODE, publishes its list of problem banks here. CR has the problem list at over 900 as of Dec. 24. Its method is simple. It does not appear to reverse engineer the CAMEL. Rather, it simply lists banks that have been subjected to public orders of regulatory action. 

IRA and Money Economics engage in reverse engineering. Money Economics offers something called a Bankability Composite Score Frequency, which is “a numerical representation of a bank’s financial status. It is developed by Money Economics to assess if a bank is safe enough to hold your deposits. This algorithm relies on historical bank data from each bank’s quarterly financial reports. It is completely data driven and blind to which bank it analyzes.” The thing is Money Economics has released new data since last June. Here’s the most recent tally:

Banks with scores below 40 are considered to be “dying.” I’ve asked when the scores will be next updated. No response as of yet.


Finally, there is IRA, which is arguably the most famous of the reverse engineers. You can find IRA’s publicly available updated list here. It aims to go beyond the FDIC number to get to a true “at-risk” statistic for banks in the US. The firm also offers individual, CAMEL-like reports on specific banks here. In short, banks with Ds and Fs are in real trouble. I could not find an explanation of how IRA does what it does. (The IRA guys are avid readers of Bank Innovation, so I imagine we’ll hear from them at some point.) What IRA does make clear is that it may reverse engineer the FDIC, but no one may reverse engineer IRA. The site warns: “You agree not to reverse engineer or imitate for commercial purposes, directly or via third parties, any programs, problem solving approaches, frameworks, tools or information provided on this site.” And that’s in ALL CAPS on the IRA site.

There is such a fuzzy gap between what the FDIC says is the situation among banks today and the reality of today’s banking situation. Of course, you may be housing your deposits in a bank that is the equivalent of a financial powder keg and you wouldn’t know it. Is that good that the American consumer is kept in the dark? Probably. Although with these entities essentially eclipsing the FDIC with more timely information, perhaps the FDIC might want real facts out there now, rather than the black-box ratings floating around online. 

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