Earlier this month, Trepp released its updated Trepp Capital Adequacy Stress Test (T-CAST) results. The test was designed in response to the requirements of the Dodd-Frank financial reform legislation to project future bank capital levels. When a bank’s projections fail to meet minimum capital ratios, the bank is considered to have failed the stress test.

The national results in the most recent T-CAST showed a slight decrease in the overall fail rate, falling from 12.7% to 12.0%. While 12% is a respectable fail rate, we wanted to break out the numbers to illustrate a few areas of interest, namely states with the most improvement or deterioration. For both analyses, states with fewer than 50 banks tested were removed as one or two banks moving in or out of the fail bucket could move the needle significantly.

The following chart shows the top ten and bottom ten states in terms of percentage point change in fail rates from Q2 2012 to Q3 2012. A negative is a positive in this instance, as it implies a drop in the failure rate (see North and South Dakota). One encouraging takeaway is that in most cases, the increases in fail risk are smaller than the decreases. In other words, states that are improving are doing so faster than other states are getting worse.

Next we look at the ten best and worst states in terms of bank failure rate. Interestingly, since our Q2 2012 T-CAST, North Dakota (the most improved state this period) was replaced by Montana (the most deteriorated state this quarter) on the list of states with the worst fail rates. Further, West Virginia jumped to the top of the top ten list, with no failures in the most recent test. It should be noted that states with fewer than 50 banks tested were excluded from these lists.

The large states with the highest T-CAST failure rates are Florida (31.7%), Georgia (29.2%), Tennessee (17.9%), Illinois (15.7%) and Minnesota (15.2%). These are also the states that have experienced the highest rate of bank closures since 2007. Although conditions in these states have improved, the high T-CAST failure rates indicate that more progress in capital raising and balance sheet healing is needed before these areas fully emerge from the recent failure cycle.