Texas Ratio
Contents
Unveiling the Texas Ratio: A Guide to Assessing Bank Health
The Texas ratio, a financial metric devised to signal potential credit issues at banks, offers insight into a bank's financial stability. This article delves into the intricacies of the Texas ratio, exploring its calculation, significance, and implications for investors and banking customers.
Understanding the Texas Ratio
Developed as an early warning system for identifying troubled banks, the Texas ratio evaluates a bank's non-performing assets relative to its tangible common equity and loan loss reserves. Originating in the 1980s, it gained prominence during Texas's energy boom and subsequent banking crisis. Gerard Cassidy and analysts at RBC Capital Markets found that banks with a Texas ratio exceeding 100 often faced failure.
Assessing Financial Health
Non-performing assets encompass defaulted loans and foreclosed real estate, posing potential expenses for banks. Tangible common equity excludes intangible assets like goodwill, focusing on resources available to cover losses. For investors and customers alike, the Texas ratio serves as a crucial indicator of a bank's financial robustness, especially for those exceeding FDIC coverage limits.
Example and Application
Calculating the Texas ratio involves dividing non-performing assets by tangible common equity. While a high ratio may raise concerns, it's essential to analyze trends over time. Several banks currently exhibit Texas ratios surpassing 100%, highlighting the need for thorough evaluation and monitoring of financial institutions.