Asset Quality
Texas Ratio
The Texas Ratio compares a bank's potential credit losses (non-performing assets + real-estate-owned) to its loss-absorbing capacity (tangible common equity + loan loss reserves). Coined during the 1980s Texas banking crisis, it remains the single most widely cited bank failure-prediction metric.
Formula
Non-Performing Assets = loans past due 90+ days still accruing + loans in non-accrual status. Real Estate Owned (OREO) is property the bank has taken back through foreclosure. The denominator is the bank's 'shock absorbers' — equity available to absorb losses plus reserves already booked against credit risk.
Why it matters
Texas Ratios above 100% historically correlate with elevated bank failure risk. The metric was developed in the 1980s by bank analyst Gerard Cassidy, who observed the pattern in failed Texas banks. The ratio is valuable because it captures the relationship between loss severity and loss-absorbing capacity in a single number.
How to interpret
Under 25%: healthy. 25-50%: normal for most community banks. 50-100%: watch — credit issues exceed half of capital. Over 100%: elevated failure risk; the bank's bad assets exceed its capacity to absorb them. The ratio should be read against trend — a stable 70% is different from a quickly rising 60%.
Thresholds
| Range | Label | Interpretation |
|---|---|---|
| < 25% | Strong | Healthy credit profile. |
| 25–50% | Normal | Typical range for community banks. |
| 50–100% | Watch | Credit issues approaching half of capital. |
| > 100% | Concern | Historically elevated failure risk. |
Worked example
Frequently asked
Why is it called the Texas Ratio?
Bank analyst Gerard Cassidy coined the metric in the 1980s after analyzing the Texas oil-and-real-estate banking crisis, when banks with this ratio above 100% failed at far higher rates than peers below the threshold.
Does the Texas Ratio always predict failure?
No — it's a strong signal, not a deterministic one. Banks above 100% can recover if non-performing assets are restructured or written off, and banks below 100% can still fail from liquidity shocks (as SVB did with a Texas Ratio near zero). It's most predictive when combined with other deterioration signals.
What's the difference between Texas Ratio and NPL Ratio?
NPL Ratio measures problem loans against total loans (a stock measure of credit quality). Texas Ratio measures problem loans against capital + reserves (a measure of capacity to absorb the losses). Texas is more failure-predictive because it captures both severity and capacity.
Sources
- FFIEC Call Report Schedule RC-N (Past Due and Non-Accrual Loans)
- FFIEC Call Report Schedule RC-M (Other Real Estate Owned)
See Texas Ratio across 4,336 US banks
BankRegReports ranks every FDIC-insured institution by texas ratio, refreshed each quarter as new FFIEC filings land.