Texas ratio: The Texas ratio measures a bank’s problem assets against the capital and reserves it has available to absorb them.
How it is calculated
Nonperforming assets, meaning nonaccrual loans, loans 90 days or more past due and other real estate owned, divided by tangible common equity plus the allowance for credit losses.
Formula
Texas ratio = nonperforming assets / (tangible common equity + allowance for credit losses)
How to read it
It was built after the Texas bank failures of the 1980s as a single screen for solvency stress. The rule of thumb is that 100% is the danger line, because at that point the problem assets equal everything the bank has to cover them with.
The common mistake. Treating it as a prediction. It is a coverage ratio at a point in time, and a bank well below 100% with a fast rising ratio is a more interesting case than one sitting steady near it.
Go deeper
- The Texas ratio explained
- BankingLens pricing and what a subscription adds: percentile rank against the bank’s own FFIEC peer group, fourteen quarters of trend, and the flags an examiner reaches for first.
See also. Nonperforming loans, Nonaccrual, Allowance for credit losses, Equity to assets.
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