What is the Texas ratio?
The FRED Blog explains the Texas ratio, a banking credit-risk metric devised by RBC's Gerard Cassidy after the 1980s Texas banking crisis. The aggregate ratio for U.S. commercial banks sits at 5.82% in Q1 2026, near its all-time low.
Intelligence analysis by Llama
A FRED Blog explainer traces the Texas ratio's origins to Gerard Cassidy's response to the 1980s Texas banking crisis. The metric divides nonperforming loans by tangible equity plus loss reserves, and the U.S. aggregate reading of 5.82% in Q1 2026 sits near the all-time low of 4.59% from Q2 2022.
Banks sometimes lend money that doesn't get paid back. The Texas ratio compares those bad loans to the money banks have saved to cover losses. A low number like 5.82% means banks are doing great; a number over 100% would mean they are in serious trouble.
Analysis
Gerard Cassidy's 1980s metric
The Texas ratio traces its origin to a specific moment in U.S. banking history: the 1980s oil and real estate crisis that devastated Texas lenders. Gerard Cassidy of the Royal Bank of Canada developed the metric to assess credit risk for banks in that state, according to the FRED Blog. The name has stuck even as the formula has been adopted by analysts tracking institutions far beyond Texas.
The construction is deliberately simple. It divides a bank's nonperforming loans by the sum of tangible equity capital and the allowance for loan losses. Nonperforming loans, per the post, include nonaccrual loans, loans 90 or more days past due, and real estate acquired through foreclosure. Tangible equity capital is total bank equity minus intangible assets — the cushion available to absorb losses.
The 5.82% reading for Q1 2026
The aggregated Texas ratio for all FDIC-insured commercial banks stood at 5.82% in the first quarter of 2026, per the FRED graph. That figure is near the all-time low of 4.59% recorded in the second quarter of 2022. In other words, the U.S. banking system's combined nonperforming loans are a small fraction of its loss-absorbing capital — a textbook signal of credit health at the aggregate level.
But the ratio is not a uniform measure across institutions. The FRED post links to "Banking Analytics: Understanding Credit Risk with the Texas Ratio" for breakdowns by bank size, implicitly acknowledging that the aggregate number can mask divergent conditions across community, regional, and money-center institutions. A 5.82% aggregate does not preclude a community bank concentrated in a stressed sector from running a much higher figure.
The 100% danger threshold
The conventional interpretation, the article notes, treats the ratio as a risk gauge: the lower it is, the smaller the credit-loss risk to a bank's capital. The headline threshold is 100% — at that point, a bank's nonperforming loans would equal its tangible equity plus reserves, meaning losses could theoretically wipe out the loss-absorbing cushion. Ratios well above 100% have historically signaled severe distress.
For now, the aggregate sits far below that danger zone. But the Texas ratio is best read as a warning indicator rather than a routine statistic — it gained prominence precisely because the 1980s Texas experience showed how quickly oil-price shocks and real estate collapses can erode bank balance sheets. The FRED post notes the data series runs from Q1 1984 to Q1 2026, a span that captures multiple credit cycles, and the current reading places the system among the healthiest stretches in that 42-year window.
Key points
- The Texas ratio was created by RBC analyst Gerard Cassidy in response to the 1980s Texas banking crisis driven by oil and real estate shocks
- The formula divides nonperforming loans by the sum of tangible equity capital and the allowance for loan losses
- The aggregate ratio for all FDIC-insured commercial banks was 5.82% in Q1 2026, near the all-time low of 4.59% set in Q2 2022
- A ratio above 100% signals that a bank's nonperforming loans could exceed its loss-absorbing capital cushion
- The FRED data series spans Q1 1984 to Q1 2026 and is available broken down by bank size in a linked companion piece
The current near-all-time-low aggregate reading suggests the U.S. commercial banking system has minimal credit distress at the systemic level. If this trend holds, banks retain ample capacity to absorb losses and extend credit to households and businesses, supporting broader economic activity.
Aggregate readings can mask stress at individual institutions or specific bank-size categories, and the FRED post links to a by-size breakdown, implicitly acknowledging that divergence exists. A localized shock to commercial real estate, agriculture, or regional economies could push specific banks well above the 100% danger threshold even as the headline number stays low.
