What is the cooke ratio?
COOKE ratio is a way to calculate how much capital the bank has in relation to risk assets. Theoretically, it indicates how well the bank is protected against risk. The cooke ratio was once used to calculate the legal minimum number for banks, but was replaced in 2006 by what was considered a fairer calculation method. The aim of the COOKE ratio is to take into account the inherent risks of the way most of the money in the banking system exists only as numbers on paper than as real cash. It is designed to be responsible for the fact that assets in the bank ownership come in two forms. The first is its capital, which covers the cash it holds, plus physical assets such as buildings. The second is his risky assets, which consist of any money lent to the debtors, and it is not guaranteed to come back because debtors can fail. Theoretically, the higher the capital ratio to risk assets, the lower the probability that the bank threatens lower than the expected level of repaymentOutflies.
The cooke ratio was named after the WP Cooke, the chairman of the Basel Bank Supervision Committee between 1988 and 1991. It is an international body that sets worldwide standards to eliminate excessive risk in banking. In 1988, the Committee reached Baseli Accord, which required banks to maintain a CookE ratio of 8%.
Cooking calculation works on the basis of a weighted risk. This means that the risk value of assets is not just a total of assets. Instead, each asset is placed in one of five categories and the total assets in this category are multiplied by a specific percentage. For example, loans to the National Government in the Bank's own country are considered so safe that the total category is multiplied by 0%, which means that these assets are effectively ignored. Risk loans fall up to 10%, 20%, 50%and 100%categories, which means some or all buttons ET is included intotal total total.
In the coming years, critics of the cooke ratio complained that these categories were too simplistic. In particular, banks claimed that the system assumed that all loans in a certain category had the same level of risk regardless of the debtor. In response, officials developed the ratio of McDonagh, named after the successor to Cooke as Chairman of the Basel Committee. The McDonagh ratio maintains the same five categories, but allows banks to tune the evaluation of individual assets based on the bank's own assessment of the Bank of a particular debtor. McDonagh ratio has been taken as an official method for Accord Basel since the beginning of 2007.