The Texas ratio is a ratio used to determine the extent of a bank's credit trouble.
The Texas ratio was created by Gerard Cassidy and other analysts at RBC Capital Markets in order to help them analyze Texas banks during their famous bust in the 1980s.
The ratio is relatively simple to compute once one has the correct inputs. It is calculated by dividing the value of a bank's (or lender's) non-performing loans by the sum of it's tangible equity capital and loan loss reserves. Other variants may include non-perfoming assets in the numerator.
The higher the resulting percentage, the worse shape the bank is in. When the ratio reaches 1:1 (100%), the bank is likely on the verge of bankruptcy.
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