The Texas Ratio was developed by RBC Capital Markets analyst Gerard Cassidy in the 1980’s to forecast which banks could fail during the 1980’s real estate bubble.
The ratio is devised by comparing a bank’s troubled loans to its capital. If the amount of bad loans equals or exceeds its capital, a ratio of 100% or higher, the bank might not have enough capital to cover its losses related to the bad loans on its books.
If a bank’s Texas ratio is 100% or higher it doesn’t necessarily mean the bank will fail, a bank can raise more capital to cover its losses, though not an easy thing to do these days during the credit crunch.
Here are the results for some SF banks at 9/30/09.