The Texas ratio compares a bank's troubled assets with tangible equity and credit-loss reserves as a screening indicator of asset-quality stress.
The Texas ratio compares a bank’s troubled assets with tangible equity and credit-loss reserves available to absorb losses. A rising ratio can signal that problem loans and foreclosed property are becoming large relative to the bank’s loss-absorbing resources.
The Texas ratio is a screening indicator, not a regulatory capital requirement or a certain predictor of failure.
A detailed version used by Federal Reserve Bank analysts is:
The allocated transfer risk reserve is often zero or immaterial for many banks, but it belongs in the more precise formulation where applicable.
Some data providers use tangible common equity rather than tangible total equity or vary the treatment of preferred stock, servicing assets, government guarantees, and restructured loans. The formula must be documented before comparing results.
Assume a bank reports:
| Numerator item | Amount |
|---|---|
| Loans 90+ days past due and still accruing | $30 million |
| Nonaccrual loans | $20 million |
| Other real estate owned | $10 million |
| Troubled assets | $60 million |
| Denominator item | Amount |
|---|---|
| Total equity | $100 million |
| Goodwill and other intangibles | ($20 million) |
| Allowance for credit losses | $15 million |
| Tangible equity plus allowance | $95 million |
The bank has about $63 of troubled assets for each $100 of tangible equity and reserves under this definition. The example does not estimate the actual loss on those assets.
| Direction or level | Cautious interpretation |
|---|---|
| Low and stable | Troubled assets are small relative to the selected loss-absorbing denominator |
| Rising | Asset-quality stress is increasing or tangible resources are declining |
| Near 100% | Troubled assets approach tangible equity plus reserves |
| Above 100% | Troubled assets exceed that denominator and warrant deeper review |
The 100% level is a warning heuristic, not a legal insolvency threshold. Banks can recover value from collateral and borrowers, earn future income, raise capital, sell assets, or receive support. Conversely, a bank below 100% can fail because of rapid deposit outflows, fraud, market losses, concentration, or other risks the ratio does not capture.
The ratio rises when:
It falls when:
A lower ratio caused by a charge-off is not automatically good news. The numerator can decline because the bank recognized a loss that also reduced capital or used reserves. Analysts should reconcile the full movement.
| Measure | Numerator | Denominator | Main use |
|---|---|---|---|
| Texas ratio | Troubled assets | Tangible equity plus reserves | Asset-quality stress relative to loss-absorbing resources |
| Nonperforming loan ratio | Nonperforming loans | Total loans | Share of the loan portfolio that is nonperforming |
| Reserve coverage ratio | Credit-loss allowance | Nonperforming loans or another credit exposure measure | Reserve coverage of problem loans |
| CET1 ratio | Regulatory CET1 | RWA | Risk-based regulatory capital strength |
| Tier 1 leverage ratio | Tier 1 capital | Non-risk-weighted exposure measure | Regulatory leverage backstop |
These measures can move in different directions. A bank may have a low Texas ratio today but significant concentrations that create losses in a future downturn.
Equity analyst Gerard Cassidy developed the measure while analyzing banks during the 1980s Texas banking crisis, when energy and commercial-real-estate losses contributed to numerous failures. The name describes that historical origin, not a metric limited to Texas banks.
The underlying bank inputs can be checked in official regulatory filings such as U.S. Call Reports or equivalent national disclosures.
This page provides general financial education, not a bank-safety determination, credit rating, supervisory finding, or personalized investment, banking, legal, or regulatory advice.