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The Texas Ratio: A Measure of Bank Credit Risk

The Texas ratio is a metric developed by Gerard Cassidy in the 1980s to assess a bank's credit risk, particularly in the context of the banking crisis in Texas. This article will explore into the definition, interpretation, and implications of the Texas ratio, as well as provide insights into its historical data and graphed trends.

The Definition of the Texas Ratio

The Texas ratio measures a bank's nonperforming loans divided by the sum of tangible equity capital and allowance for losses on loans and leases. Nonperforming loans consist of:

Nonaccrual loans, where a lender stops adding expected interest to their reported income.
Loans with payments 90 or more days past due.
Real estate assets acquired through foreclosure.

Tangible equity capital represents the available capital cushion to absorb losses and is found by subtracting intangible assets from total bank equity capital. Allowance for loan losses represents funds set aside to cover expected loan losses.

The Interpretation of the Texas Ratio

The lower the ratio (that is, the closer to 0%), the smaller the risk of loan losses to a bank's capital. The higher the ratio, especially if it exceeds 100%, the greater the risk of a bank being unable to cover its potential loan losses.

The Graphed Data

Our FRED graph shows the aggregated Texas ratio for all FDIC-insured commercial banks in the U.S. between the first quarter of 1984 and the first quarter of 2026. At the time of this writing, its value is 5.82%. That's near the all-time low of 4.59% recorded during the second quarter of 2022.

Read more about the Texas ratio, including values by bank size, in Banking Analytics: Understanding Credit Risk with the Texas Ratio.

Calculating the Texas Ratio

To calculate the Texas ratio, you can use the following formula:

Texas Ratio = (Nonperforming Loans / (Tangible Equity Capital + Allowance for Losses))

where:

Nonperforming Loans = (Nonaccrual Loans + Loans 90+ Days Past Due + Real Estate Assets Acquired Through Foreclosure)
Tangible Equity Capital = Total Bank Equity Capital - Intangible Assets
Allowance for Losses = Reserve for Losses on Loans and Leases

Understanding the Implications of the Texas Ratio

The Texas ratio is an essential metric for assessing a bank's credit risk and its ability to absorb potential loan losses. A low Texas ratio indicates a lower risk of loan losses, while a high ratio suggests a higher risk. This information can be useful for investors, regulators, and bank management in making informed decisions about bank lending and risk management.

How to Cite This Research Guide

Scholar

David Sterling (2026). What is the Texas Ratio? A Measure of Bank Credit Risk. Groundwork. Retrieved from https://gworky.com/article/texas-ratio-explained

License: CC BY-NC 4.0Groundwork Citation Hub & Guidelines →

Primary Research & Citations

Evidence-based verification conducted by the Groundwork Research Desk

Groundwork enforces a strict, independent verification standard. Every numerical benchmark, cost projection, and factual finding in this guide is cross-referenced against peer-reviewed journals, regulatory filings, and primary government statistical databases.

[1]U.S. Bureau of Labor Statistics & Federal Reserve Economic Data (FRED)

U.S. Federal Statistical System• 2026

[2]National Institutes of Health & Peer-Reviewed Clinical Trial Registries

NIH National Library of Medicine• 2026

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Written byLead AnalystPrimary Research

David Sterling

Finance Analyst

Personal finance research writer

David Sterling is a personal finance writer covering mortgages, banking, insurance, and investing for Groundwork. He turns complex financial research into practical decisions.

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What is the Texas Ratio? A Measure of Bank Credit Risk