What the Texas Ratio Means for Your Bank

Why the Texas Ratio Exists

In the mid-1980s, Texas experienced a banking crisis driven by the collapse of oil prices and commercial real estate. Hundreds of banks failed. Analyst Gerard Cassidy at RBC Capital Markets developed a simple ratio to identify which banks were most likely to fail next. The formula compares a bank's problem assets — non-performing loans plus other real estate owned — against the capital and reserves available to absorb those losses.

The insight was powerful: banks whose problem assets exceeded their loss-absorbing capacity almost always failed. During the 2008 financial crisis, the Texas Ratio again proved predictive — banks that crossed 100% frequently ended up in FDIC receivership. Today, it remains one of the most watched early-warning indicators in banking analysis.

How the Formula Works

The Texas Ratio formula is: Non-Performing Assets ÷ (Tangible Common Equity + Loan Loss Reserves). Non-performing assets include loans that are 90+ days past due, loans on non-accrual status, and real estate the bank has repossessed (other real estate owned, or OREO). The denominator represents the bank's available resources to absorb those specific losses.

What it tells you: What percentage of the bank's loss-absorbing capacity is already spoken for by assets that are currently in trouble. A ratio of 30% means that if all currently non-performing assets became total losses, they would consume 30% of the bank's available buffer.

What it doesn't tell you: The Texas Ratio only captures assets already classified as non-performing. It does not capture loans that are current today but at risk of default. A bank with a low Texas Ratio but heavy concentration in a single sector (like commercial real estate in a weakening market) may have rising risk that has not yet appeared in the non-performing numbers.

How to use it: Check the Texas Ratio on PlainBankData's bank profiles. Compare across peer banks in the same state or region. The trend matters as much as the absolute number — a ratio rising from 5% to 20% over three quarters is more concerning than a stable ratio at 20%.

What the Numbers Mean

While no single threshold is definitive, the following ranges provide a practical framework for interpreting Texas Ratio values:

Under 15%: Low risk. The bank's problem assets are well within its capacity to absorb losses. Most well-run banks operate in this range.

15% to 30%: Moderate. Worth monitoring, especially if the trend is rising. Some banks in this range are working through temporary loan problems that will resolve; others are at the beginning of a deterioration cycle.

30% to 50%: Elevated risk. The bank has a meaningful concentration of problem assets. Cross-reference with capital ratios and profitability — if the bank is also unprofitable, the situation is more urgent.

50% to 100%: High risk. Problem assets are consuming a large share of the bank's buffer. Regulatory scrutiny is likely. Depositors with balances above FDIC limits should consider diversifying.

Above 100%: Critical. Historically, banks at this level have a high probability of failure. FDIC insurance protects deposits up to $250,000, but access to funds can be disrupted during a resolution. Very few U.S. banks currently operate at this level.

What This Means for You: A Practical Framework

Step 1 — Look up your bank. Search for your bank on PlainBankData and check the Texas Ratio displayed on its profile card. Compare it against the state average for context.

Step 2 — Evaluate the trend. A single quarter's number is less informative than the direction. If the Texas Ratio has risen significantly over the past 2-3 quarters, that warrants attention even if the absolute level is moderate.

Step 3 — Check your FDIC coverage. If all your deposits at this bank are within the $250,000 FDIC insurance limit (per ownership category), your principal is protected regardless of the Texas Ratio. Review our FDIC insurance guide for details on coverage categories.

Step 4 — Diversify if above limits. If you hold balances above FDIC limits at a bank with a high or rising Texas Ratio, consider spreading deposits across multiple FDIC-insured institutions. This is prudent banking practice regardless of any single bank's health indicators.

Frequently Asked Questions