Texas Ratio Calculator & Bank Failure Risk Lab
Model commercial bank asset quality, non-performing assets (NPAs), tangible common equity (TCE), loan loss reserves, and FDIC failure vulnerability.
Institutional Asset Quality Presets
Credit Risk & Capital Inputs
Enter balance sheet problem assets and capital reserves in thousands ($000).
1. Distressed Credit Assets (Numerator)
2. Loss-Absorbing Capital Cushion (Denominator)
3. Overall Balance Sheet Context
Asset Quality & Capital Depletion Diagnostics
| Total Problem Distressed Assets: | $2,200,000k | NPAs ($1,800,000k) + 90+ Days Past Due ($400,000k) |
| Total Loss-Absorbing Cushion: | $5,400,000k | Tangible Common Equity ($4,500,000k) + ALLL ($900,000k) |
| NPA to Gross Loans Ratio: | 3.75% | Non-performing assets / Total gross loans |
| Reserve Coverage Ratio: | 50.00% | Allowance for credit losses / Non-performing assets |
| Max Loss Tolerated Before Insolvency: | +$3,200,000k | Additional charge-offs absorbed before reaching 100% Texas Ratio |
| Post-NPA 50% Write-Down TCE: | $4,300,000k | Tangible equity remaining after liquidating reserves and 50% bad debt |
Texas Ratio Sensitivity Matrices
Sensitivity Grid 1: Problem Assets vs Tangible Common Equity (Texas Ratio %)
Evaluates how simultaneous changes in delinquent loans and equity capital alter the bank's Texas Ratio.
Sensitivity Grid 2: Loan Loss Additions vs Charge-Off Shocks (Remaining Capital Buffer $000)
Simulates capital erosion as cumulative bad loan write-downs exhaust reserves and eat into tangible common equity.
Worked Calculation & Mathematical Specification
Formulated by banking analyst Gerard Cassidy during the 1980s savings and loan crisis, the Texas Ratio is the preeminent metric used by bank regulators, institutional credit rating agencies, and distressed debt investors to identify depository institutions at acute risk of failure.
$$\text{Texas Ratio} = \frac{\text{Non-Performing Assets (NPAs)} + \text{Loans 90+ Days Past Due}}{\text{Tangible Common Equity (TCE)} + \text{Allowance for Credit Losses (ALLL)}} \times 100\%$$
$$\text{Total Distressed Credit} = \text{Non-Accrual Loans} + \text{OREO Foreclosed Assets} + \text{90+ Days Delinquent}$$
$$\text{Loss Absorption Buffer (\$)} = (\text{TCE} + \text{ALLL}) - \text{Total Distressed Credit}$$
$$\text{Reserve Coverage Ratio} = \frac{\text{Allowance for Credit Losses (ALLL)}}{\text{Non-Performing Assets}} \times 100\%$$
$$\text{Supervisory Failure Threshold: } \text{Texas Ratio} \ge 100.0\% \implies \text{Severe Insolvency Risk}$$
Step-by-Step Calculation Walkthrough (Current Simulation State)
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Bank Failure Prediction & Asset Quality Rules
- The 100% Insolvency Boundary: When the Texas Ratio exceeds 100%, bad loans mathematically outstrip the institution's combined equity capital and loan reserves. In the 2008 financial crisis, over 90% of US commercial banks whose Texas Ratio exceeded 100% were subsequently shut down and placed into FDIC receivership.
- Tangible Common Equity vs Regulatory Capital: The Texas Ratio specifically uses Tangible Common Equity rather than Total Tier 1 capital, deliberately stripping out goodwill, deferred tax assets, and perpetual preferred stock. This focuses exclusively on hard gone-concern loss absorbency.
- Interaction with CECL (Current Expected Credit Losses): Under GAAP Topic 326 (CECL), banks must provision for expected lifetime losses on loan origination day rather than waiting for delinquency. This strengthens the ALLL denominator earlier in the credit cycle, mitigating sudden Texas Ratio spikes.
Texas Ratio & Bank Failure Knowledge Check Quiz
Test your understanding of bank asset quality, non-performing loans, loss absorption cushions, and FDIC closure indicators.
1. If a commercial bank has $500M in non-performing assets, $100M in loans 90+ days past due, $800M in tangible common equity, and $200M in loan loss reserves, what is its Texas Ratio?
2. What critical threshold in the Texas Ratio historically signals that a bank is at severe risk of FDIC failure and receivership?
3. Why is Tangible Common Equity (TCE) used in the Texas Ratio denominator instead of Total Book Equity?
4. How can a bank rapidly lower its Texas Ratio during a period of asset quality deterioration?
Frequently Asked Questions
What is the Texas Ratio and how is it calculated for commercial banks?
The Texas Ratio is a prominent credit quality and bank health metric developed to predict commercial bank failure. It divides a bank's non-performing assets by its loss-absorbing capital cushion: Texas Ratio = ((Non-Performing Assets + Loans 90+ Days Past Due) / (Tangible Common Equity + Allowance for Credit Losses)) * 100%.
Why is a Texas Ratio above 100% considered an indicator of bank failure?
A Texas Ratio exceeding 100% signifies that a bank's total volume of distressed and non-performing loans exceeds its entire tangible equity capital plus its loan loss reserves. If those bad loans must be charged off, the bank will become technically insolvent and face regulatory closure or FDIC receivership.
What components make up the numerator and denominator of the Texas Ratio?
The numerator measures total credit distress: Non-Accrual Loans, Restructured Loans (TDRs), Other Real Estate Owned (OREO foreclosed collateral), and Loans 90+ days past due still accruing. The denominator measures primary loss absorption: Tangible Common Equity (common equity minus goodwill and intangible assets) plus the Allowance for Credit Losses (ALLL/ACL loan loss reserves).
How did the Texas Ratio originate during the 1980s banking crisis?
The ratio was formulated in the late 1980s by Gerard Cassidy, a banking analyst at RBC Capital Markets, to analyze troubled banks in Texas following the oil and real estate bust. Cassidy found that every bank in Texas whose ratio exceeded 100% subsequently failed, establishing it as an industry standard early-warning metric.