Texas Ratio = ( lender's non-performing assets / ( tangible common equity capital + loan loss reserves) )
Note that the lender's non-performing assets represent the Non performing loans and Real Estate Owned.
The Texas ratio is a measure of a bank's credit troubles which was developed by Gerard Cassidy and others at RBC Capital Markets. Specifically, a ratio of more than 100 (or 1:1) is considered a warning sign. This ratio can be useful when an asset held on a bank's balance sheet is falling in value, such as with oil reserves or mortgage assets.
In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.
Gerard Cassidy estimated that 200 - 300 Banks worldwide would go bankrupt in the year 2008. However, taking into consideration the global financial crisis of 2008, he made the new estimate that more than 1000 banks will bankrupt in the upcoming 3 to 5 years.