Texas Ratio: A Guide to Bank Stability

The Texas Ratio is a simple yet powerful tool for gauging the stability of banks. It's calculated by dividing a bank's non-performing loans by its tangible common equity.

This ratio helps identify banks that may be at risk of insolvency, which can be a major concern for depositors and investors. A higher Texas Ratio indicates a bank is more vulnerable to financial stress.

Banks with a Texas Ratio above 250 are generally considered to be at high risk of insolvency. This is because they have too little capital to absorb losses on non-performing loans.

Calculating the Texas Ratio is a straightforward process. You'll need to divide a bank's non-performing assets by its tangible common equity and loan loss reserves.

The non-performing assets include loans that are 90 days or more past due, as well as foreclosed and repossessed assets. The tangible common equity is the bank's net worth, minus the value of preferred stock. Loan loss reserves are funds set aside to cover potential losses on non-performing assets.

To calculate the Texas Ratio, simply divide the non-performing assets by the tangible common equity and loan loss reserves. For example, if a bank has $10 million in non-performing assets and $20 million in tangible common equity and reserves, its Texas Ratio would be 50% ($10 million divided by $20 million).

A Texas Ratio of 100% means that a bank's troubled assets are equal to its tangible common equity and reserves. This indicates that the bank is at high risk of failure. A ratio below 50% is generally considered to be a good sign, while a ratio above 100% is cause for concern.

Here's a table to help illustrate the calculation:

Note that a lower Texas Ratio indicates a lower risk of bank failure.

The Texas Ratio is a financial metric that assesses a bank's level of risk.

It was first introduced in the 1980s as a way to identify banks that were at risk of failure due to a high number of bad loans. The ratio was originally developed during the savings and loan crisis in Texas, where many banks were failing due to bad loans.

The Texas Ratio compares a bank's troubled assets to its tangible common equity and reserves. This comparison helps regulators, analysts, and investors assess a bank's financial health.

A high Texas Ratio can indicate that a bank is experiencing financial difficulties and may be at risk of insolvency. This could be due to a variety of factors, including a high level of bad loans, poor management, or an economic downturn.

On the other hand, a low Texas Ratio is a good sign that a bank is financially stable and has a low level of risk. This could be due to a conservative lending strategy, a strong management team, and a healthy economy.

The Texas Ratio is just one metric that should be considered when assessing a bank's financial health. It should be used in conjunction with other metrics and factors, such as the bank's capitalization, profitability, and liquidity.

In fact, the Texas Ratio has proven to be a useful tool for consumers who want to choose a financially sound and stable bank.

A low Texas Ratio can indicate a bank is financially stable and has a low level of risk.

However, a bank with a low Texas Ratio can still have high fees or poor customer service, making it not the best choice for you.

It's also important to regularly monitor a bank's financial performance and stability, as its situation can change over time.

Texas banks have consistently outperformed their national counterparts in terms of profitability, with a return on assets (ROA) of 1.1 percent last year, compared to 0.9 percent nationwide.

This achievement marks the fifth consecutive year that Texas banks have done better than their counterparts nationwide in terms of profitability.

The Texas Ratio can be a useful tool for assessing a bank's financial health and level of risk. A low Texas Ratio can indicate a bank is financially stable and has a low level of risk.

A high Texas Ratio, on the other hand, may indicate a bank is experiencing financial difficulties and may be at risk of failure. This could put your deposits at risk.

In the late 1980s, 20 percent of Texas banks had a Texas ratio exceeding 100 percent, earning Texas a reputation for having a high risk of bank failure. In contrast, only 0.9 percent of Texas banks had a Texas ratio greater than 100 percent in 2011.

In 2010, a remarkable 32 percent of Georgia banks recorded a Texas ratio exceeding 100 percent, making them even riskier than Texas banks in the 1980s. This highlights the importance of considering multiple factors when choosing a bank.

The Texas Ratio should not be the only factor considered when choosing a bank. Other factors, such as reputation, customer service, fees, and location, should also be taken into account.

In fact, a bank may have a low Texas Ratio but high fees or poor customer service. In this case, it may not be the best choice for you, even if it is financially stable.