What is the Texas ratio?

The Texas ratio is an unofficial indicator used to determine how stable a US bank is. It’s calculated by dividing a bank's bad assets by its capital. The result can give advance warning that it has made bad investment choices.

Where have you heard about the Texas ratio?

The ratio was developed in the 1980s by market analyst Gerard Cassidy as a way of predicting bank performance during the American real estate bubble of that period. He found that if the ratio is 1.00 or above, the bank is in significant danger of failure.

What you need to know about the Texas ratio.

In the US, banks are tightly regulated over the amount of capital they have in reserve and the quality of loans they've issued. When a bank fails, the Federal Deposit Insurance Corporation (FDIC) steps in and seizes its assets.

Several websites publish Texas ratios so bank customers don’t have to work them out themselves. Although potential investors can use the Texas ratio as a reliable guide of which banks are heading for trouble, it's no guarantee of failure. Banks with high ratios can stay solvent, while banks that seem solid sometimes hit the buffers.