DEFINITION of 'Texas Ratio'

The Texas ratio was developed to warn of credit problems at particular banks or banks in particular regions. The Texas ratio takes the amount of a bank's non-performing assets and divides this number by the sum of the bank's tangible common equity and its loan loss reserves. A ratio of more than 100 (or 1:1) indicates that non-performing assets are greater than the resources the bank may need to cover potential losses on those assets.

BREAKING DOWN 'Texas Ratio'

The Texas ratio was developed as an early warning system to identify potential problem banks. It was originally applied to banks in Texas in the 1980s and proved useful for New England banks in the early 1990s.The Texas ratio was developed by Gerald Cassidy and other analysts at RBC Capital Markets.

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