The “Texas ratio” for checking a bank’s fiscal health was developed by Gerard Cassidy of RBC Capital Markets (Portland. ME) in the 1980s. Cassidy was checking Texas banks, but the retio was soon applied to the banks of other states as well. The value of a lender’s non-performing assets is divided by the lender’s equity. If the ration is above 1:1 or 100&, then the bank could be in financial trouble.
The term “Texas ratio” was seldom used in even the financial literature until the 2008 financial crisis, when lists of troubled banks and their Texas ratios became available to the public.
Wikipedia: Texas ratio
The Texas ratio is a measure of a bank’s credit troubles. The higher the Texas ratio, the more severe the credit troubles.
Developed by Gerard Cassidy and others at RBC Capital Markets, it is calculated by dividing the value of the lender’s non-performing assets (Non performing loans + Real Estate Owned) by the sum of its tangible common equity capital and loan loss reserves.
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.
What Does Texas Ratio Mean?
A ratio developed by Gerald Cassidy and other analysts at RDC Capital Markets to measure the credit problems of particular banks or regions of banks. The Texas ratio takes the amount of a bank’s non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm’s tangible capital equity plus its loan loss reserve. A ratio of more than 100 (or 1:1) is considered a warning sign.
19 July 1992, Toronto Star, “A plunging stock price highlights the veneraqble institution’s woes” by Konrad Yakabuski, pg. H1:
Based on the Texas ratio (a measure designed by Portland, Maine-based analyst Gerard Cassidy to assess the financial health of U.S. banks), Royal’s non-performing loans have skyrocketed from an insignificant $74 million in 1989 to an unwieldly $1.14 billion or 4.28 per cent of all loans at the end of the first quarter.
How healthy is your bank? The Texas ratio.
by rn79870 » Sun Jul 20, 2008 4:39 am
From CBS evening news last night - 07/19/2008
(CBS) The surprise failure of IndyMac Bank last Friday has many Americans wondering about the health of their own banks, reports CBS News correspondent Priya David.
“The economy has slowed down and it has caused problems for some banks,” said Paul Mersky, chief economist for the Independent Community Bankers of America.
The Federal Deposit Insurance Corporation, which oversees the nation’s 8,500 banking institutions is reportedly watching 90 additional banks.
But some Wall Street analysts using a little known formula called the “Texas ratio” say as many as 150 financially strapped institutions could fall over the next 18 months.
The Texas ratio is calculated by dividing the institution’s bad and delinquent loans by its cash on hand plus money set aside to cover loans that go bad. A ratio of 100 or higher means a bank is in deep financial distress. IndyMac’s recent Texas ratio was 116.
Other banks and savings institutions’ Texas ratios, once closely held by banking industry insiders, are now leaking to the public.
FDIC List of Troubled Banks and the Texas Ratio
Author: Brian McKay
October 14th, 2008
The Texas Ratio is one measure that might offer a clue. The ratio was developed by RBC Capital Markets analyst Gerard Cassidy in the 1980’s to forecast which banks could fail during the 1980’s real estate bubble...deja vu, anyone?
The ratio is devised by comparing a bank’s troubled loans to its capital. If the amount of bad loans equals or exceeds its capital, a ratio of 100% or higher, the bank might not have enough capital to cover its losses related to the bad loans on its books.
If a bank’s Texas ratio is 100% or higher it doesn’t necessary mean the bank will fail, a bank can raise more capital to cover its losses, though not an easy thing to do these days during the credit crunch.
The Market Oracle
How to Profit from the Coming Plague of Busted Bankrupt Banks
Apr 09, 2010 - 07:17 AM
The Texas Ratio is another way to estimate how many banks might fail. The Texas Ratio indicates how sound a bank is. It compares a bank’s problem loans with the money it has available to deal with them. When the Texas Ratio exceeds 100%, it means the bank has more bad loans than it can afford and it’s probably going to fail.
Gerard Cassidy invented this ratio in the 1980s after studying busted Savings and Loans in post oil-boom Texas. Cassidy is currently working as an analyst for RBC Capital Markets, and he’s still tracking the Texas Ratio.
At the end of the third quarter 2009, 388 banks had Texas Ratios greater than 100%.
Daily Business Review (FL)
Tale of the Texas ratio: Two banks that failed
July 26, 2010
A bad Texas ratio number is not a foolproof predictor that a bank’s failure is imminent - or even that it will fail at all.
But the recent collapse of two Miami area banks does help fuel the argument that the ratio can predict with some accuracy which banks are on the shakiest ground.
The Wall Street journal guide to the 50 economic indicators that really matter:
From Big Macs to “zombie banks, the indicators smart investors watch to beat the market
By Simon Constable and Robert E. Wright
New York, NY: Harper Business
Texas “Zombie Bank” Ratio
You use the so-called Texas Ratio. It was invented in the early 1980s by Gerard Cassidy and his colleagues at RBC Capital Markets. In the simplest terms it compares the ratio of bad assets at a bank to its available capital. That available capital is a cushion against the firm going bust.
New York City • Banking/Finance/Insurance • (2) Comments • Friday, July 15, 2011 • Permalink
Good explanation. Are you aware of any place to see info regarding what banks are facing a Texas ratio?
It is really important for any bank to maintain Texas ratio in order to avoid any critical financial issues. Bank should follow the tricks that are good for business development along with keeping the good budget and financial status.