What is the ratio of capital adequacy?
The ratio of capital adequacy is a formula used by the financial regulators to monitor how well the bank protects against risks. The principle of the ratio is the division of the current capital of the bank against current risks. In many countries, the bank ratio must be kept on a certain or above a certain number. For the purposes of this formula, the bank's capital is classified to two levels. The general principle is level 1 capital by what the bank can use immediately when trading. Level 2 capital is what would be available during the liquidation process if the bank closed. Since the first is more valuable, some measurements of the capital adequacy ratio only take into account the level 1 capital.
The risks measured in these calculations are actually the Bank's assets. At first glance, this may seem confusing, but it is the risks that these assets may not be realized. For example, if the bank has lent money, it is considered as an asset but there is a risk if this money may not get back.
Most countries adhere to the Basel agreements that take their name from being determined by the Basel Committee of the Bank for International settlements. The original agreement of 1988, known as Basel I, simply required banks with international presence to maintain a capital adequacy ratio of at least 8%. Basel II, agreed in 2004, added other rules requiring governments to check whether the circumstances of the individual banks could mean that this requires a higher ratio. It also required banks to be more open about the risks they have undergone, the theory is that the market would then adjust the Bank's asset valuation based on this information.
Basel agreements have been revised over the years to take into account larger specific assets. For example, the bank may have the same dollar amounts tied in loans to their country and in unsecured loans to individuals. Wslepice evaluates assets and risks, the first is obviously much more valuable because Je Significantly more likely to get cash back.
To take into account this, some measurements of the capital adequacy ratio multiply each asset of standard risk weighing. The loan could be weighed at zero, which means that it is effectively ignored for risk assessment purposes. The loan for a less reliable source could be weighed at 0.75, which means that 75% of the loan value is included in the risk of calculating the ratio.