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Honesty in Banking

November 9, 2009

IN BANKING THERE’S SOMETHING called the “Texas Ratio.” It is essentially the number you come up with when you divide a bank’s bad assets by the stuff it has that is actually worth something. The higher the Texas Ratio is the worse the situation the bank is in, the more likely the bank will fail.

The hilarious aspect of Texas Ratios is that the top number, the bad stuff, “is subjective.” After all, you only have the bank’s word on what number to plug in up there.

…it is possible for a bank to be too honest. If they report tons of bad loans and rack up a high score, their Texas Ratio could turn into a self-fulfilling prophecy. [Marketplace]

Because if a bank is “too honest,” customers and investors might be hesitant to put their money on the line with them.

Our financial system might be a precarious house of cards, but positive thinking surely counts for something, right?

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