Safest Banks

In America, we have let our guard down when it comes to our banking relationships. We assume that everything will be fine if our bank fails. After all, the FDIC insures our deposits up to $250,000. Why worry?

I hate to break this to you, but the FDIC's Deposit Insurance Fund (DIF) -- AKA the money used to cover bank failures -- has been all but drained.

In 2007, the DIF had a healthy $52.4 billion. But since 2008 (after the housing meltdown), more than 413 banks have failed, and it's taken a devastating toll on the once-solid reserve fund.

According to the FDIC, the balance in the DIF at the end of Q2 2012 was just $22.7 billion -- almost 57% below where it was before the financial crisis. And while the FDIC also reported that banks are on slightly better financial footing than last quarter, there are still a staggering 732 "problem banks" that are carrying troubled assets totaling $282 billion. By comparison, the FDIC identified just 76 problem banks by the end of 2007.

I don't know about you, but I'm not willing to assume that the FDIC will always be there to cover my savings. Instead, I want to pick the safest bank in my area, so that I know the FDIC will never have to get involved.

Each quarter, I use FDIC data to calculate a very special metric called the "Texas ratio."

The Texas ratio was first developed by a financial wizard named Gerard Cassidy who used it to correctly predict bank failures in Texas in the 1980s. While the ratio has been excellent at predicting bank failures, it can also be used to find the safest banks in America.

The math can get complicated, but here's what you need to know -- the ratio looks at the number of "bad assets" a bank owns versus the amount of equity in the bank. If there are too many bad assets and/or not enough equity, a bank becomes very vulnerable. The closer the Texas ratio gets to zero, the lower the bank's risk of failure. Once the ratio gets above 1.0, things get a little shaky.

To illustrate, here's a list of the last 10 banks that were seized by FDIC. In every case, the Texas ratio is above 1.0.

And out of the five largest banks in the United States, none have a perfect score, but Chase and Citibank come closest to the mark. Their scores are highlighted in the chart below, showing the top banks' Texas ratios.

Right now there are over 7,300 banks in the United States, but only 383 of them can boast a perfect Texas ratio of 0.0.

And the list can change from quarter to quarter. For example, of the 359 banks that had perfect Texas ratios when we last published our list, about 60 no longer do.

That doesn't mean that the banks are no longer safe -- far from it, actually. The highest Texas ratio for a bank that fell off the list was 0.18, which is still a very strong score.

While some dropped off the list, more than 80 others came on to it. The total number of banks with perfect Texas ratios grew from 359 to 383. Of the new banks on the list, most needed just a slight improvement -- such as from 0.001 to 0 -- to reach the perfect Texas ratio.

That perfect score is exactly what our list is all about.

Read on to see if your bank made the list:

Note: The banks listed in bold in the chart below did not appear in the previous version of this list, which was released in June 2012.