Definition of 'Texas Ratio'
The Texas Ratio is named after the state of Texas, which has a long history of banking crises. In the early 1980s, Texas experienced a severe banking crisis that led to the failure of over 100 banks. The Texas Ratio was developed in an effort to prevent future banking crises by identifying banks that were at high risk of failure.
The Texas Ratio is considered to be a more accurate measure of capital adequacy than other metrics, such as the leverage ratio. The leverage ratio is calculated by dividing a bank's total assets by its equity. However, the leverage ratio does not take into account a bank's liabilities, which can be a significant source of risk. The Texas Ratio, on the other hand, does take into account a bank's liabilities, which makes it a more comprehensive measure of capital adequacy.
The Texas Ratio is a useful tool for regulators and investors to assess a bank's financial health. A high Texas Ratio indicates that a bank has a strong capital cushion and is less likely to fail. A low Texas Ratio, on the other hand, indicates that a bank is at high risk of failure.
The Federal Reserve has set a minimum Texas Ratio of 8% for banks. However, some regulators believe that this minimum is too low and that banks should have a higher Texas Ratio. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave regulators the authority to set higher capital requirements for banks. However, the regulators have not yet taken any action to increase the minimum Texas Ratio.
The Texas Ratio is a valuable tool for assessing a bank's financial health. However, it is important to note that the Texas Ratio is only one measure of capital adequacy. Regulators and investors should also consider other factors, such as a bank's asset quality, liquidity, and earnings, when assessing its financial health.
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