"You might feel that sometimes the bank doesn't trust you," write Simon Constable and Robert E. Wright in The WSJ Guide to the 50 Economic Indicators That Really Matter (Harper Business, 2011)....
"You might feel that sometimes the bank doesn't trust you," write Simon Constable and Robert E. Wright in The WSJ Guide to the 50 Economic Indicators That Really Matter (Harper Business, 2011). "Well, if you think that's bad, get this: Sometimes they don't even trust each other."
That sentence deserves a long pause, because most families have never once considered it. We spend our banking lives on one side of the counter, being assessed. The bank checks our income, our history, our collateral, and decides whether we are safe to lend to. It rarely occurs to us that behind the counter, the banks are running the same cold assessment on one another, every single day, in an enormous market where they lend each other money overnight and for months at a time. And here is the fact this essay is built on: the results of that assessment are public. Banks price their trust in each other in numbers anyone can look up. Which means that when the banking system starts to doubt itself, it says so, out loud, in its own language, days or months before any queue forms outside a branch. Banks warn each other before they warn depositors. A family that learns even a little of the language gets the warning too.
This essay, drawing on four chapters of Constable and Wright's book, is for the elders and founders who decide where the family's money sleeps: which banks, in what proportions, with what paperwork. The book is from 2011 and written for American investors, and we will be honest at each step about what has aged and what travels. The instinct it teaches has not aged at all.
Start where the book starts, with the rate banks charge each other for short-term unsecured loans, meaning loans backed by nothing except "the good faith and creditworthiness of the borrowing bank." In the book's day this was Libor, the London Interbank Offered Rate, published daily. The authors quote market strategist Ashraf Laidi on what that daily number really was: "When the Libor is being reset in London at eleven a.m., that is partially a pulse of liquidity amongst banks." When the rate rose, money was not flowing freely between banks; someone, somewhere, was being quietly charged for being doubted.
An update the book could not have known: Libor is gone. After a rate-rigging scandal, it was retired, and the world's financial system now runs on replacement benchmarks such as SOFR in the United States and similar rates elsewhere, most of them based on actual transactions rather than banks' self-reported estimates. The plumbing changed; the principle did not. There is still, every day, a published price for banks lending to banks, and it still spikes when trust drains. The book records the pattern from 2008: the rate fell into the recession as rates normally do, then spiked violently during the autumn credit crunch, a "risk premium ... demanded of those with money to lend during periods of massive uncertainty," and then subsided as normalcy returned. Fear, priced, timestamped, public.
The raw rate, though, mixes two stories: rates rise in booms because everyone wants to borrow, and rise in panics because nobody wants to lend. The book's solution is the TED spread: take the interbank rate and subtract what the government pays to borrow for the same period. Since lending to the US government was treated as riskless, whatever remains is pure credit risk, the naked price of doubt between banks. The book quotes economist David Rosenberg's unimprovable summary: "It represents the oxygen level in the financial markets." And his scale: "A narrow spread indicates confidence. A wide spread, less confidence. A really wide spread, pandemonium."
Why should a family care about oxygen levels in a market it will never trade in? Because of the transmission the book spells out. "Invariably what happens in the financial arena ends up in the real side of the economy," Rosenberg says. When banks doubt each other, they lend less to everyone, and less lending means slower business, tighter jobs, and, at the extreme, banks failing with depositors inside. The book lists the spread's history honestly: it widened in 1987, 1990, 1998, 2000, 2008, and 2010, and recessions followed in 1990, 2000, and 2008 but not in 1987 or 1998. The signal is real and imperfect, which is why the book insists on trend plus corroboration before acting, and quotes Rosenberg's advice to move gradually: "don't do anything whole hog."
The same grammar extends beyond banks. The book's credit spreads chapter measures the gap between what the safest companies pay to borrow and what shakier ones pay. When that gap widens, investors are pricing in danger, and capital stops moving. "Capital being put to work makes the world go round, economically speaking," the book quotes researcher David Ranson. "This is what happened in October 2008," when spreads blew out, capital froze, "hence, you got a recession." Widening spreads of every kind are the same sentence in different dialects: the people whose full-time job is judging repayment have collectively raised their estimate of not being repaid.
The spreads tell you about the system. The book's most practical chapter for a family is about a single bank: yours.
In the 1980s, analyzing the wave of Texas bank failures, Gerard Cassidy and colleagues at RBC Capital Markets built what became known as the Texas Ratio. The book presents it through the image of the zombie bank: "Neither alive enough to make loans, nor dead enough to die or get taken over, they linger and drag on the economy." The arithmetic is a fraction. On top: the bank's bad assets, its loans in default or restructuring, plus repossessed property. On the bottom: the bank's tangible capital, its equity plus loan-loss reserves, with intangibles like goodwill stripped out. The book is emphatic about that stripping, quoting Cassidy: "When you see a bank having troubles, then goodwill and intangibles are usually worthless." Cassidy describes the capital as sandbags on a riverbank, the last defense between the flood of bad loans and everyone standing behind the bank.
Then the threshold. "I covered the Texas banks in the 1980s and what I learned from them was that when their Texas Ratio broke through 100% they went bust," Cassidy says in the book. At 100 percent, the bad loans have eaten the sandbags. "A bank with a Texas Ratio over 100% is in dire straits," he adds. "It's like driving a car with the tachometer in the red zone. If you keep doing that, eventually the car will blow up on you."
Sit with what this means for a depositor. A bank's health is not a mystery revealed only in collapse. It is largely arithmetic, computed from numbers the bank itself publishes in its annual report and regulators publish in their statistics, and professionals watch that arithmetic continuously. The people inside the system rarely wait for the queue outside the branch; they read the ratio and move early. The queue is what the public does because nobody taught it the arithmetic.
Honesty about translation: the book's data sources are American regulators, and in many of the countries our readers bank in, bank disclosures are thinner, later, and rosier, with bad loans understated until the end. That weakens the precision of the ratio but strengthens the reason for the habit, because in exactly those places the official warning, when it finally comes, comes latest. You may not compute a clean Texas Ratio for a bank in Kampala or Lagos. You can still read its published accounts once a year for the trend in non-performing loans against capital, notice whether it keeps aggressive promises, and watch the plainest retail warning sign the zombie image implies: a bank offering deposit rates far above every peer is usually not being generous. It is paying a risk premium to attract money that informed lenders will no longer give it cheaply, which makes a too-good deposit rate the retail cousin of a widening spread.
The book stops at reading the indicators. We go further, into what a family actually does, and it comes down to three disciplines.
First, spread the sleep. No single bank should hold all of a family's cash, for the same reason no single roof shelters the whole clan at a funeral. Nearly every country with a formal banking system runs deposit insurance, and every scheme has a ceiling per depositor per bank; above the ceiling you are an unsecured lender to that bank, exactly like the banks in the interbank market, except unpaid for the risk and last to know. Learn your country's ceiling, and where family cash exceeds it, split it across unrelated institutions, or across insured family members' names where the rules allow. For diaspora families this is doubly true of the remittance path: money in transit, sitting in a fintech wallet or transfer service, is often not deposit-insured at all, so it should rest there for days, not months.
Second, take the pulse annually. Once a year, on a date the family keeps, someone assigned by name spends one hour per bank: read the bank's results announcement for bad loans versus capital, note its deposit rates against the market, search its name in the financial press, and, where a solvency or capital-adequacy figure is published, write it down beside last year's. Not to trade on, but to notice trend. And when the newspapers say interbank rates or credit spreads are spiking, treat it the way a coastal family treats a falling barometer: not a reason to panic, a reason to check the boats. In bank terms, per Rosenberg's counsel, incrementally: let surplus cash favor the strongest of your banks for a season, keep an extra month of operating money where you can reach it, and postpone locking long deposits into the bank you trust least.
Third, write it down, because this is where families actually lose money in bank failures. Not only to the failure itself, but to the silence around it: accounts the children never knew existed, in banks nobody monitors, in names nobody can access when the elder who opened them is gone or unwell. A resolution process, or an inheritance, is painful with paperwork and hopeless without it. The family's banking map belongs in one findable place: every institution, account type, whose name it is in, roughly what it holds, where it sits against the insurance ceiling, who checks it and when. That map is precisely the kind of living record the Document Vault in LegacyPot exists to keep, beside the account documents themselves, so that the family's answer to "where does our money sleep, and how safely" is never locked inside one person's memory.
Here is the whole essay in one image. In the autumn of 2008, ordinary depositors on several continents discovered on a weekend that their bank was in trouble. The interbank market had known for months; the spreads had been screaming since summer; the analysts running Cassidy's arithmetic had known which balance sheets were rotten for longer still. The information was public the entire time. It simply was not read by the people with the most at stake and the least cushion.
Constable and Wright wrote their book to close exactly that gap, to make the economy's most telling dials legible to people who are not specialists, and these four chapters are the ones a family ignores at the highest cost. You do not need to trade a single spread. You need only the posture they teach: that a bank is a counterparty, not a parent; that its trustworthiness is measured daily by its peers and published; and that a family which spreads its deposits, takes an annual pulse, and keeps its banking map written down has converted the banks' private early-warning system into a household one.
The banks warn each other first. There is no rule that says a family cannot be listening.