Texas Ratio Explained: What It Means for Australian Bank Stability in 2025

In 2025, with global interest rates stabilising and memories of bank failures still fresh, a decades-old metric is making waves among investors and risk managers: the Texas Ratio. Originally developed during the US savings and loan crisis, the Texas Ratio is a blunt yet powerful tool for gauging a bank’s risk of failure. But what does this mean for Australians with their savings, super, or shares in local banks? Let’s unpack why this metric matters right now.

What Is the Texas Ratio, and Why Is It Suddenly Relevant?

The Texas Ratio was created in the 1980s by Gerard Cassidy, a banking analyst who wanted a way to quickly spot which banks were most likely to collapse under the weight of bad loans. The formula is straightforward:

• Texas Ratio = Non-Performing Assets (NPAs) / (Tangible Equity + Loan Loss Reserves)

In plain English: it compares a bank’s troubled loans (and foreclosed assets) to the capital it actually has on hand to absorb losses. If the ratio climbs above 100%, the bank’s bad loans exceed its shock absorbers—a red flag for potential insolvency.

Why the resurgence in 2025? Banking regulators globally have tightened capital requirements, but stubborn inflation and a cooling property market have pushed up loan defaults in several economies, including Australia. Investors and depositors are hungry for quick, transparent ways to assess bank risk beyond glossy annual reports.

How Are Australian Banks Faring on the Texas Ratio in 2025?

Australian banks have long been considered some of the world’s safest, thanks to strong regulation and conservative lending. But recent data from APRA (Australian Prudential Regulation Authority) shows a modest uptick in non-performing loans, especially in commercial property and some regional lending portfolios.

• Major banks (CBA, Westpac, NAB, ANZ) currently sport Texas Ratios well below the danger zone—most under 20% as of Q1 2025, according to their latest filings.

• Some regional banks and non-bank lenders have seen their Texas Ratios drift higher, in a few cases approaching 40-50%, mainly due to exposure to struggling sectors like retail property and agriculture.

• International banks operating in Australia are under similar scrutiny, especially those with high exposure to Asia-Pacific real estate.

For context, during the US bank failures of the late 2000s, many institutions with Texas Ratios above 100% failed within 12 months.

What Should Savers, Investors, and Analysts Look Out For?

The Texas Ratio isn’t a magic crystal ball, but it’s a useful starting point. Here’s how Aussies can use it in 2025:

• Deposit safety: If you hold large deposits with a smaller bank, check its latest Texas Ratio. APRA regularly publishes stress test results and non-performing loan data.

• Investor due diligence: Shareholders and bondholders should monitor Texas Ratios in quarterly reports—especially for banks with significant commercial lending or overseas exposure.

• Context matters: A rising ratio isn’t always a death sentence. Some banks may have temporary spikes due to one-off events. Look for trends and management’s plan to address problem loans.

• Policy backdrop: In 2025, APRA has introduced enhanced disclosure rules, making it easier for the public to see asset quality data. The RBA’s stable cash rate is helping banks manage funding costs, but persistent inflation could pressure borrowers further.

And remember: Australia’s Financial Claims Scheme still guarantees deposits up to $250,000 per account holder, per bank. But for sums above that, or for investors, understanding a bank’s risk profile is essential.

Real-World Example: The Regional Bank Watchlist

Earlier this year, Bendigo and Adelaide Bank’s Texas Ratio crept from 18% to 27% after a spike in non-performing agribusiness loans. Management responded by increasing loan loss reserves and tightening credit standards. The market reacted calmly, but analysts noted the transparency around the Texas Ratio helped reassure depositors and investors. In contrast, a smaller non-bank lender saw its ratio jump above 60% and faced a run on wholesale funding, leading to a rapid merger with a stronger institution.

The Takeaway: A Useful Tool, Not the Whole Story

In 2025, the Texas Ratio is more than a historical curiosity—it’s a sharp, accessible metric that empowers Australians to make smarter decisions about where to bank, invest, or park their cash. While it’s not the only risk indicator you should consider, it’s a red flag worth watching as economic conditions evolve. Keep an eye on those quarterly disclosures and remember: informed vigilance beats blind trust in any market cycle.