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With 123 bank failures this year and more to come, you may be wondering about your own bank. Try the Texas Ratio for a quick snapshot of how healthy it is. Just take your bank’s most recent report and divide the bad stuff on the books by the good stuff. Let’s hope the ratio is no where near 1:1. Of course, that’s assuming your bank is fully disclosing weak assets. Investopedia explains the Texas Ratio was developed as an early warning system to identify potential problem banks and was originally applied to banks in Texas in the 1980s. It proved useful once again for New England banks in the early 1990s. Running the Texas Ratio formula can be useful when an asset held on a bank’s balance sheet is falling in value, such as with oil reserves or mortgage assets.

So since EDGAR Online has all the most current public bank reports, our subscribers can set up and manually run the Texas Ratio on the banks of their choice.  [Not a subscriber, but want to try this? Sign on for a free I-Metrix trial and we’ll walk you through it or call 888-870-2316 or 212-457-8200 and mention the Texas ratio article.]

Specifically, 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.

As reported in a recent Marketplace segment on Public Radio, it’s just a warning, not a predictor. Banks can be conservative or aggressive in identifying and reporting weak assets. They know how to run the Texas Ratio too and don’t want to raise red flags unless they have to…