Texas Ratio

The Texas Ratio is a credit risk indicator used to assess the financial health and failure risk of banks and financial institutions, calculated by dividing a bank's total non-performing assets (NPAs — including non-performing loans and real estate owned) by its tangible common equity plus loan loss reserves. Developed by Gerard Cassidy at RBC Capital Markets during the 1980s US savings and loan crisis — and named after the high failure rate of Texas banks during that period — a Texas Ratio above 100% is historically associated with a significantly elevated risk of bank failure, as it signals that the bank's non-performing assets exceed its available financial cushion to absorb losses. A ratio below 100% — and ideally significantly lower — indicates that the bank has sufficient capital and reserves to absorb its problem assets without becoming insolvent. For investors on Ventura Securities evaluating Indian public sector and private sector banks — particularly during periods of asset quality stress — the Texas Ratio is a useful supplementary metric alongside Gross NPA ratio, Net NPA ratio, and Provision Coverage Ratio for assessing the true fragility or resilience of a bank's balance sheet.