The name

In the 1980s, Texas had a banking crisis whose causes included shocks in oil prices and real estate investments. In response, Gerard Cassidy of the Royal Bank of Canada developed the Texas ratio metric to assess a bank’s credit risk in that state.

The definition

The Texas ratio measures a bank’s nonperforming loans divided by the sum of tangible equity capital and allowance for losses on loans and leases.

Nonperforming loans consist of the following:

1. Nonaccrual loans, where a lender stops adding expected interest to their reported income.
2. Loans with payments 90 or more days past due.
3. Real estate assets acquired through foreclosure.

Tangible equity capital represents the available capital cushion to absorb losses and is found by subtracting intangible assets from total bank equity capital. Allowance for loan losses represents funds set aside to cover expected loan losses.

The interpretation

The lower the ratio (that is, the closer to 0%), the smaller the risk of loan losses to a bank’s capital. The higher the ratio, especially if it exceeds 100%, the greater the risk of a bank being unable to cover its potential loan losses.

The graphed data

Our FRED graph shows the aggregated Texas ratio for all FDIC-insured commercial banks in the U.S. between the first quarter of 1984 and the first quarter of 2026. At the time of this writing, its value is 5.82%. That’s near the all-time low of 4.59% recorded during the second quarter of 2022.

Read more about the Texas ratio, including values by bank size, in Banking Analytics: Understanding Credit Risk with the Texas Ratio.

How this graph was created: Search FRED for and select “Balance Sheet: Loans and Leases in Nonaccrual Status, Millions of U.S. Dollars, Not Seasonally Adjusted.” Click on the “Edit Graph” button and under the “Customize data” section in the “Edit Line” tab, search for “Balance Sheet: Loans and Leases 90 Days or More Past Due, Millions of U.S. Dollars, Not Seasonally Adjusted” and click “Add.” Repeat for “Balance Sheet: Total Assets: Other Real Estate Owned, Millions of U.S. Dollars, Not Seasonally Adjusted,” “Balance Sheet: Total Liabilities and Capital: Total Equity Capital: Total Bank Equity Capital, Millions of U.S. Dollars, Not Seasonally Adjusted,” “Balance Sheet: Total Assets: Intangible Assets, Millions of U.S. Dollars, Not Seasonally Adjusted,” and “Balance Sheet: Total Assets: Total Loans and Leases: Less: Reserve for Losses, Millions of U.S. Dollars, Not Seasonally Adjusted.” Enter the formula 100 * (a+b+c) / (d-e+f).

Suggested by Steven Tian and Diego Mendez-Carbajo.

The takeaway

Small businesses with lower credit risk tend to receive all the financing they seek more often than businesses with higher credit risk, which may be newer, smaller, and more in need of financing.

Small business credit 

Fed Small Business is a collection of resources related to, yes, small business. It provides economic research and analysis by the 12 Reserve Banks of the Federal Reserve System as well as the national Small Business Credit Survey (SBCS).

The SBCS asks firms with fewer than 500 employees how much financing their business sought and obtained in the past year. Our FRED graph above shows the share of firms applying for financing that were approved for the full amount they sought. Survey responses are available from 2016 through 2025.

These firms are sorted into three different categories of credit risk: low (solid blue line), medium (dashed green line), and high (dotted orange line).

As you might expect, firms with low credit risk consistently received the full amount of the financing they were seeking more frequently than firms with riskier credit profiles. As Fed Small Business researchers point out, “riskier firms are more often newer and smaller than those with stronger credit scores. As a result, it may be the case that businesses most in need of financing have the most difficulty accessing those funds.”

Small business details 

The SBCS offers rich details about the industry, firm size, geographical location, and demographic characteristics of the owners. These data help tell some compelling stories. For example:

• Small rural firms were consistently more likely to receive the full amount of financing compared with their urban counterparts.
• Small firms with annual revenues above $1 million were more likely to receive the full amount of financing compared with firms with revenue below that threshold.
• Small veteran-owned firms are generally at par with small non-veteran-owned firms regarding their full access to the financing requested. But short-lived gaps between these two groups occasionally appear.

Learn more about the demographics of small business owners.

How this graph was created: Browse FRED by release and select “Small Business Credit Survey” and its “Approved for New Financing” release table. Scroll to the section labeled “Credit risk” and check the boxes next to the series labeled “Low credit risk,” “Medium credit risk,” and “High credit risk.” Scroll to the bottom of the page and click “Add to Graph.” Repeat for the other demographics discussed.

Suggested by Krishna Meegada and Diego Mendez-Carbajo.

The quarterly banking profile of FDIC-insured institutions provides an overview of their aggregate financial condition, including data on bank earnings, loan and deposit activity, and asset quality. According to theses profiles, mortgage-backed securities make up more than half of the total assets held on their balance sheets.

Our FRED graph above shows the makeup of these institutions’ balance sheets between the first quarter of 1984 and the first quarter of 2026. The asset classes are as follows, in descending order of relative shares:

1. Mortgage-backed securities (blue area): bonds backed by pools of home mortgages (60.7%)
2. U.S. Treasury securities (orange area): debt issued by the US federal government (33.5%)
3. State and municipal securities (green area): bonds issued by states and local governments to fund public projects (5.8%)
4. Equity securities (purple area): shares of ownership in a corporation (0.0%)

We can see that mortgage-backed securities consistently represent the lion’s share of assets. However, between 2008 and the time of this writing, the share of those securities has decreased while the share of US Treasury and state and municipal securities has increased. Researchers at the Kansas City Fed point to changes in the regulatory environment and evolving preferences for risk to explain this changing mix.

These assets can also be classified as either trading securities or investment securities. Trading securities are intended to generate short-term financial gains and typically make up a small share of a bank’s total assets. Investment securities, on the other hand, make up the larger share of a bank’s total assets and typically have longer holding periods. Their type is reported on the balance sheet as either “held to maturity” (HTM) or “available for sale” (AFS).

Our second FRED graph below shows the proportions of HTM (blue area) and AFS securities (green area) held in FDIC-insured banks between the first quarter of 1994 and the first quarter of 2025.

Since 1996, most of the investment securities are available for sale, meaning they are held for an indefinite period of time and could be sold before maturity. However, since 2010, the proportion of investment securities that banks intend to hold until expiration, or maturity, has increased. At the time of this writing, they amount to 39.8% of all investment assets.

The Kansas City Fed researchers mentioned above ascribe this changing pattern to a strategy to better protect the value of mandatory capital levels against financial risk.

How these graphs were created: First graph: Browse FRED data by source and navigate to “Federal Deposit Insurance Corporation.” Select the release “FDIC Quarterly Banking Profile” and the release table “Assets and Liabilities of FDIC-Insured Commercial Banks and Savings Institutions.” Scroll to the section labeled “Securities” and check the boxes next to the series labeled “U.S. Treasury Securities,” “Mortgage-Backed Securities,” “State and Municipal Securities,” and “Equity Securities.” Scroll to the bottom of the page and click “Add to Graph.” Click the “Edit Graph” button and select the “Format” tab to choose “Graph Type: Area” and “Stacking: Percent.”
Second graph: Navigate to “Federal Deposit Insurance Corporation” source again to select the same release and release table. Again, scroll to the section labeled “Securities” and check the boxes next to the series labeled “Available for Sale (Fair Value)” and “Held to Maturity (Amortized Cost).” Click “Add to Graph.” Click “Edit Graph” and select “Format” to choose “Graph Type: Area” and “Stacking: Percent.”

Suggested by Joe Kledis, Collin Eldridge, Melanie LeTourneau and Diego Mendez-Carbajo.