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The Texas Ratio is a financial ratio that is used to measure the credit standing of banks or credit unions. It is a system that identifies early warning signs of problematic financial institutions regarding their credit. The ratio shows a comparison between a banks tangible common equity capital and its total troubled loan portfolio (Non-performing loans/assets). In this regard, if the Texas Ratio is high, then the bank is said to be facing greater issues relating to its credit.
The formula for the Texas Ratio is written as follows:
Non-Performing Loans + Real Estate Owned/ Tangible Capital Equity + Loan Loss Reserve
Most often, a Texas Ratio extending beyond 1:1 is considered to be a warning sign. The ratio is generally represented using percentages, so if your bank has a Texas Ratio over 100%, it may be worthwhile to investigate further the current health of your bank.
Texas Ratio for credit unions is calculated in a slightly different manner due to the variation in data, and differences in reporting jargon as well. In case of credit unions the total troubled assets are calculated by combining the real estate and delinquent loans which are then divided by the combined capital and loan loss reserves.
The Texas ratio was created by Gerard Cassidy in collaboration with individuals at RBC Capital Markets.