Doing the math: How the ratio is calculated
The troubled asset ratio compares the bank's troubled assets against its ability to withstand losses.
Here's how it's calculated:
Banks are required to report detailed financial results to the FDIC at the end of each quarter. The FDIC is required to make that information available to the public.
First we calculated the total troubled assets at a bank. That adds together three elements: loans that are 90 days or more past due; loans that are in "non-accrual status," meaning the bank is no longer adding interest from the loan to its income; and real estate that the bank already owns, usually from foreclosure. Excluded are loans which are wholly or partly guaranteed by the U.S. government, such as FHA and VA loans, because the banks bear little or no risk.
That total is divided by the bank's ability to withstand losses. That's a sum of two elements: what's called Tier 1 capital (which is mostly money invested in the bank by shareholders) and loan loss reserves, or money set aside to cover losses.
The result is reported as a percentage. So a bank with $100 million in capital and reserves, and troubled assets of $10 million, would have a troubled asset ratio of 10 percent.