Texas Ratio

How the Texas Ratio Bank Rating Works

The Texas Ratio is a way to measure how risky a bank is. The formula tells you how likely the bank is to be dragged down by bad loans. By looking at Texas Ratios, you may be able to spot banks that are more likely than others to fail. Let's look at the basics of the Texas Ratio.

• What Happens in a Bank Failure?

Texas Ratio Formula

To calculate the Texas Ratio, you divide a bank's bad debt on the books by the amount of money it has to absorb the bad debt.

Bad debt refers to loans that are delinquent or 'non-performing'. In other words, these are loans that aren't getting paid back.

Money available to absorb the bad debt refers to tangible equity capital and loss reserves (or money that the bank has set aside in anticipation of some loans going bad).

After crunching the numbers, you get a Texas Ratio. If the number approaches 100% (or higher), the Texas Ratio suggests that the bank is more likely to fail.

Using the Texas Ratio

Note that the Texas Ratio is just one measure of a bank's strength. A high Texas Ratio does not guarantee that a bank will fail, but it's a useful piece of data. There's plenty of debate about the value of the Texas Ratio, so don't just use it in isolation - it's a piece of a larger puzzle.

• How to Find the Safest Banks

You don't have to calculate the Texas Ratio yourself. You can use a variety of sources if you search the web for Texas Ratios. Of course, you'll have to accept their assumptions and definitions.