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"Migration Analysis" of Banks, Part 2

Thu May 20, 2010

In our previous post, we looked at how the capitalization of banks in the US, Alabama, and Georgia "evolved" over the past 10 years. In order to gauge how the behavior of the past three years has been anomalous, the following tables show the transition probabilities for the US, Alabama, and Georgia, respectively, divided over the periods from 2000-2006 and 2007-2009. The rows in these matrices show the "previous quarter's" capital category, as compared to the columns (that show the "following quarter's" capital category).



US (2000-2006 and 2007-2009)

Well CapitalizedAdequately CapitalizedUnder-CapitalizedSignificantly Under-CapitalizedCritically Under-CapitalizedNot Found
Well Capitalized99.1979% and 99.3969%0.2878% and 0.2053%0.0008% and 0.0000% 0.0000% and 0.0000%0.0161% and 0.0344%0.4973% and 0.3635%
Adequately Capitalized40.3947% and 56.0516%56.3552% and 39.8810%0.0580% and 0.0000% 0.0000% and 0.0000%1.4510% and 2.4802%1.7411% and 1.5873%
Under-Capitalized100.0000% and N/A0.0000% and N/A0.0000% and N/A0.0000% and N/A0.0000% and N/A0.0000% and N/A
Significantly Under-Capitalized40.0000% and 0.0000% 0.0000% and 0.0000% 0.0000% and 0.0000% 0.0000% and 0.0000%40.0000% and 66.6667%20.0000% and 33.3333%
Critically Under-Capitalized10.1103% and 16.8853%7.3529% and 25.5562%0.0000% and 0.0000% 0.0000% and 0.0000%78.6765% and 48.6024%3.8603% and 8.9561%


AL (2000-2006 and 2007-2009, no banks ever found to be under-capitalized or significantly under-capitalized)

Well CapitalizedAdequately CapitalizedUnder-CapitalizedSignificantly Under-CapitalizedCritically Under-CapitalizedNot Found
Well Capitalized99.3975% and 99.6277%0.2728% and 0.0532%0.0000% and 0.0000% 0.0000% and 0.0000% 0.0000% and 0.0000%0.3297% and 0.3191%
Adequately Capitalized55.8140% and 62.5000%37.2093% and 25.0000%0.0000% and 0.0000%0.0000% and 0.0000%4.6512% and 0.0000%2.3256% and 12.5000%
Under-CapitalizedN/AN/AN/AN/AN/AN/A
Significantly Under-CapitalizedN/AN/AN/AN/AN/AN/A
Critically Under-Capitalized100.0000% and 42.8571% 0.0000% and 14.2857% 0.0000% and 0.0000% 0.0000% and 0.0000% 0.0000% and 28.5714% 0.0000% and 14.2857%


GA (2000-2006 and 2007-2009, no banks ever found to be significantly under-capitalized)

Well CapitalizedAdequately CapitalizedUnder-CapitalizedSignificantly Under-CapitalizedCritically Under-CapitalizedNot Found
Well Capitalized98.8575% and 99.1792%0.4958% and 0.3388%0.0108% and 0.0000%0.0000% and 0.0000%0.0216% and 0.0521%0.6144% and 0.4300%
Adequately Capitalized42.5339% and 62.5000%54.2986% and 32.0313%0.9050% and 0.0000%0.0000% and 0.0000%0.9050% and 3.1250%1.3575% and 2.3438%
Under-Capitalized100.0000% and N/A0.0000% and N/A0.0000% and N/A0.0000% and N/A0.0000% and N/A0.0000% and N/A
Significantly Under-CapitalizedN/AN/AN/AN/AN/AN/A
Critically Under-Capitalized0.0000% and 16.9811%47.0588% and 35.8491%0.0000% and 0.0000%0.0000% and 0.0000%47.0588% and 33.9623%5.8824% and 13.2075%


So what can we make out of all of these numbers? First, let's look carefully at the nationwide numbers, and we'll focus on pairs of transition probabilities that show significant differences between numbers in a given pair. These differences indicate that a change in behavior has occurred between the two windows of time that we're examining. The most notable pairs that grab attention are the recovery and dispositions of "Adequately Capitalized" banks. Nationwide, as well as in both of the states that we are examining, less time is being spent in this state, with a significant increase in the likelihood that these banks recover to being "Well Capitalized". Only in Alabama did the likelihood of a bank in this state end up either merging, being acquired, or dissolving. This would seem to be indicative of bank management being more responsive in realizing the issues associated with the current climate.

The other item to note is the recovery of "Critically Under-Capitalized"banks. While it is difficult to draw any significant conclusions in the case of Alabama (due to the small number of observations), Georgia has shown a significant reduction in the amount of time spent with a bank in this state; this general trend coincides with a similar trend nationwide, and is again likely due to the responsiveness of the regulators involved.