The Texas ratio was developed to indicate credit problems at particular banks or institutions in particular locations. The sum of a bank’s tangible common equity plus loan loss reserves divided by the amount of non-performing assets is known as the Texas ratio. The bank has more non-performing assets than it has resources to cover any potential future losses on these assets if the ratio is higher than 100 (or 1:1).
Knowing the Texas ratio could be advantageous for investors as well as customers. Customers of banks will check the Texas ratio to ensure the security of their funds. If a client has assets worth more than the $250,000 cap set by the Federal Deposit Insurance Corporation, this is significant (FDIC).
The Texas ratio functions effectively when paired with other research, like several financial ratios. A high Texas ratio does not necessarily mean that the bank will fail because many banks may operate with high ratios.