Texas Ratio
Categories: Metrics
Everything is bigger in Texas (no Viagra joke here). The blue skies, the stars at night, belt buckles, hair, all of it. And the bigger a bank’s Texas ratio is, the more financial trouble it’s in. That’s because the “Texas ratio” measures a bank’s credit woes.
Here’s the formula:
Texas ratio = (NL + REO) / (E + LLR)
NL is the bank’s nonperforming loans, REO is the property it owns through foreclosure, E is its equity, and LLR is its loan loss reserves. If the ratio is higher than 100, or 1-to-1, the bank’s in trouble. It doesn’t have enough resources to cover potential losses on its nonperforming assets.
The Texas ratio was developed way back in the 1980s as a tool to analyze banks in Texas—hence the name—but it’s still used today to help predict whether a bank or other financial institution is potentially on the brink of a big, Texas-sized failure.
