The term "Texas Ratio" was coined by RBC Capital Markets analyst Gerard Cassidy and others at the firm's equity research teams, who used the ratio to identify potential bank failures when covering banks in Texas during the 1980s, a period when the state was a receivership hotspot. The Texas ratio is calculated by taking total nonperforming assets, including loans 90 or more days delinquent, and dividing them by tangible total equity plus loan loss reserves.

"The regulators essentially look at capital as a firewall. If you breach the firewall, you're going out of business," Cassidy told SNL. "If somebody's at 101%, does that mean they're going to go out of business? Probable. One hundred and twenty percent? A higher probability. The higher a company goes above 100%, the more likely it is the company's not going to make it."

Cassidy uses data at the consolidated level from SEC filings and SNL's own database to calculate the Texas ratio. SNL compiled lists of banks and thrifts with the highest Texas ratios as of March 31, 2008, using regulatory data at the top-tier reporting level for banks and at the savings institution level for thrifts. In the current environment, 13 thrifts and 48 banks have Texas ratios above the 100% threshold, compared to the median Texas ratios among banks and thrifts of 6.6% and 6.5%, respectively. Four banks have failed so far in 2008, including ANB, First Integrity, Hume Bank and Douglass National Bank, three of which had Texas ratios well in excess of 100%.

One of the more striking aspects of the data is the fact that most of the companies on the high-Texas-ratio list are relatively small compared to many of the banks that failed during the most recent wave of bank failures which hit in the early 1990s.

"Today, the big banks for the most part don't have numbers that are frightening," Cassidy said. "Most of what we've been seeing has been in the small banks."

FDIC Chairwoman Sheila Bair said at a June 5 Senate Banking Committee hearing that her agency is keeping a particularly close eye on banks with between $1 billion and $10 billion in assets that have large residential construction loan portfolios.

In April, SNL took a look at the largest bank failures that occurred between the second half of 1990 and 1994, and found that 25 institutions with at least $2.1 billion in assets failed over that time period. In the current environment, only eight banks and thrifts with more than $1.0 billion in assets have Texas ratios above 100% , however. One of those companies, Fremont General Corp. unit Fremont Investment & Loan ($6.05 billion), recently sold substantially all of the assets of its 22-branch network for $58 million, plus a 2% premium on $5.6 billion in deposits, under pressure from the FDIC, and Fremont General expects to file for bankruptcy.

But while the number of large institutions with elevated Texas ratios in the present day is lower than in the early 1990s, some of those that did make the list are quite large: Downey Financial Corp. unit Downey Savings & Loan Association clocks in at $13.13 billion in assets, AmTrust Financial Corp. unit AmTrust Bank at $17.30 billion, Flagstar Bancorp Inc. unit Flagstar Bank FSB at $15.90 billion and IndyMac Bancorp Inc. unit IndyMac Bank FSB at $32.01 billion.

To put the size of those companies in perspective, the largest institution to fail in the early '90s was Bank of New England, at $13.4 billion in assets. The largest bank resolution transaction in history involved Continental Illinois Bank and Trust Co., which had $40.67 billion in assets as of 1983, before collapsing amid a severe bank run in May 1984, according to the FDIC.

It is noteworthy that some of the banks and thrifts on the high-Texas-ratio list have undergone significant capital raises or have agreed to be acquired since March 31, the most recent date regulatory data is available. Colorado FSB agreed to be acquired by the owner of Provident Funding Associates LP, and Federal Trust Corp. commenced a $35.0 million common stock offering to improve its capital and liquidity positions, as well as those of its unit, Federal Trust Bank. In addition, Flagstar completed a capital-raising effort May 20, netting proceeds of $94 million, and PFF Bancorp Inc., the holding company for PFF Bank & Trust, proposed a $460 million offering June 5.

Many experts expect the number of failures in the quarters ahead to be significantly lower than that witnessed in the late 1980s and early 1990s, when literally thousands of U.S. banks and thrifts went under. Cassidy believes that about 300 banks and thrifts will eventually fail over the course of the current cycle. By contrast, 534 institutions failed in 1989 alone. Bair recently noted that the regulator's list of "problem" institutions currently stands at 1.1% of total institutions, compared to record highs of 9.9% reached in the early 1990s.

One of the reasons many industry observers cite for the comparatively low expected level of failures in the present cycle concerns an improved bank regulatory structure. When the Jimmy Carter and Ronald Reagan administrations allowed thrifts to make new kinds of loans other than mortgages, the government did not accompany those new lending capabilities with corresponding safety and soundness regulations. That imbalance eventually resulted in a lot of bad loans of a variety thrifts were not used to making, particularly in commercial real estate, according to Federal Home Loan Bank Board member Lawrence White.

"The cliché at the time was 'see-through office buildings,'" White told SNL. "All of this stuff ends up being foreclosed on." White served on the FHLBB, which later became the OTS, between 1986 and 1989.

Although federal regulators missed a lot of calls in the subprime mortgage meltdown, the structural regulatory imbalance of the S&L crisis does not exist today, according to many government observers.

"We got a better regulatory system, a tighter system," as a result of the S&L crisis, White said.

Despite this improvement, Cassidy believes regulators are not as well-staffed to handle a receivership outbreak as they have been in previous decades. The FDIC has been beefing up its recruitment efforts in an attempt to cope with more bank failures, but Cassidy noted that "they had those people on staff" 20 years ago.

Today's banking downturn has not been driven by non-residential, construction-related loans like those that fueled problems in the '80s and '90s, but Cassidy anticipates significant problems ahead with such lending activities.

"We think those are the next shoes to drop at banks in the next 12 months," Cassidy told SNL, arguing that most residential housing problems have already been priced into the values of most bank stocks. "The next wave to take stocks down even lower will be rising credit defaults in leveraged loans, as well as commercial real estate and construction, nonresidential loans," Cassidy said. "The new headlines are going to go from foreclosures in the inland empire and Miami-Dade County to new defaults on hotels, motels, office buildings and strip malls."

Access to capital has also been relatively easy for many large institutions in the current market downturn, and several big companies, including Citigroup Inc., Washington Mutual Inc., National City Corp. and Wachovia Corp. have been able to raise billions in short order to help fend off disaster. Smaller institutions may not be able to access funds as easily, however, according to Cassidy.

"The small banks would have a challenging time raising capital, because I think you're more limited in your investor pool than the large banks," Cassidy told SNL.

Even larger companies can run into capital raising problems if their Texas ratio gets particularly high.

"When you get over 100%, even if you're a big bank, probability of access to capital is greatly reduced because everybody sees the writing on the wall," Cassidy said.

IndyMac said in a May 28 blog posting that by using certain measures of capital and including credit marks on its loans-held-for-investment portfolio, a secondary market reserve, and valuation reserves on real estate owned, its Texas ratio would decline to 68%. Such a level would still give IndyMac the twenty-fourth-highest Texas ratio among U.S. thrifts, however. At least one analyst has already warned of the potential for IndyMac to go into FDIC receivership as a result of obstacles to the company's ability to raise capital.

Downey's troubles have also been no secret. The company reported a first-quarter net loss of $8.89 per share, and Moody's rates Downey Savings & Loan's financial strength at D+. Nonperforming assets at the company reached 13.24% at April 30.

But while capital is clearly a concern for many institutions regardless of asset size, most larger companies can count on a diversified asset base to help hedge risks to particular loan types. Many smaller banks that specialize in a single loan type could find themselves in danger going forward, even if those loans are not the subprime mortgages that have been making headlines. Bair has voiced particular concern regarding institutions with "monoline" business models.

ANB Financial, for instance, failed after carrying an extremely elevated level of delinquencies on construction and land development loans, and such loans constituted more than 77% of the bank's total loan portfolio. Several other banks have similarly high delinquency rates with large portions of their lending operations dedicated to construction and land development. Many industry observers have also voiced concerns that consumer lending will soon become a problem for the industry, and the OCC recently warned of trouble ahead with home equity loans.

But while many banking institutions are at-risk in the current banking environment, Cassidy does not believe that the industry's current problems cannot be overcome.

"The country will get through it," Cassidy said, cautioning that "it's going to be very painful."

Four bank failures are already on the books in 2008, and "the number will go up," according to FDIC Chairman Sheila Bair, who said that banks with "monoline business models" are particularly at risk. The FDIC is eyeing mid-sized banks with $1 billion to $10 billion in assets that have large residential construction lending portfolios with particular scrutiny.

"We are seeing and will continue to see some banks fail," Conference of State Bank Supervisors Chairman Timothy Karsky said.

Not all of the comments from regulators were quite so bleak, however. OTS Director John Reich said the thrift industry is performing "remarkably well" and continues to demonstrate "solid" capital levels to cushion against asset problems. Although the number of thrifts the OTS classifies as "problem" institutions has risen to 17, it remains well below levels reached in 1992, when more than 200 thrifts fit into the category.

"There is no comparison to the late '80s and early '90s, when hundreds of thrift institutions failed," Reich said.

An OTS spokesman recently told SNL that Reich is unsure if thrifts currently maintain adequate reserves for potential loan losses, however.

"He doesn't know what he doesn't know," OTS spokesman William Ruberry told SNL on May 27, adding, "There's an unknown out there about how much exposure there is to the loans that could be a problem."

Deteriorating credit quality remains a major concern for the regulators, who anticipate that problems in the housing market will continue for some time, according to testimony from today's hearing.

"The housing market bottom isn't here yet," Federal Reserve Board Vice Chairman Donald Kohn said.

"We clearly are not out of the woods," Comptroller of the Currency John Dugan said.

But the regulators also emphasized that credit problems have spread well beyond the troubled mortgage market.

"We let it get out of control," Bair said, referring to loan underwriting standards across asset types.

Kohn said that nonperforming assets "more than doubled" last year at U.S. banks, while Dugan said the credit quality is on the decline for "credit card loans, auto loans, small business loans, and to a lesser extent, C&I loans and commercial real estate unrelated to housing.?

Dugan has previously warned about coming problems in home equity lending, and reiterated those concerns at the hearing. Reich said that about 7.8% of thrift assets are in home equity lines of credit, with total thrift industry exposure totaling $118 billion.

Officials also insisted that regulatory agencies remain prepared to handle a new slate of failures, even if the coming wave includes large banks.

"We have the tools to handle this" without a major hit to the federal deposit insurance fund, Karsky claimed.

Dugan insisted that "access to capital has been much better" than in previous periods of financial system strain, which he believes should keep the number of troubled institutions below levels reached in the early 1990s.

Nevertheless, some industry observes believe regulators are not quite as well-equipped to handle a major wave of failed banks.

"The regulators today don't seem to be as equipped personnel-wise as they were back in the '80s," RBC Capital Markets analyst Gerard Cassidy told SNL in a recent interview. Cassidy covered a host of banks that went under in Texas during the late '80s, and he developed a metric known as "The Texas Ratio," which can help predict banks likely to fail by measuring a company's ability to pay off problem assets. In recent months, the FDIC has been recruiting hundreds of employees to beef up its division that handles bank failures.

Bair also acknowledged that the FDIC's deposit insurance fund has dropped to levels approaching federal minimums. The deposit insurance fund is the source of money that the government uses to pay off depositors at banks that go under. The fund currently stands at 1.19% of total deposits, according to Bair. If the ratio drops to 1.15%, the FDIC is required to implement a 5-year fund restoration plan.

The prospect of the deposit insurance backstop slipping below 1.15% is "certainly within the realm of possibility" according to Bair.

"We're trying to prepare for all contingencies" Bair said. Bair has been active in developing system-wide regulatory proposals to help limit the scope of damage to the banking system, including a plan to authorize the U.S. Treasury to lend to troubled homeowners.