Capital Ratios
What Are Capital Ratios?
Capital ratios are financial metrics used to measure a bank’s capital relative to its assets and risk exposure. They indicate a bank’s ability to absorb losses and remain financially stable.
Why It Matters
Capital ratios are essential for maintaining trust in the banking system. Regulators use them to ensure banks can withstand financial stress and protect depositors.
How Capital Ratios Work
Key capital ratios include:
- Tier 1 capital ratio (core capital vs risk-weighted assets)
- Total capital ratio (overall capital adequacy)
- leverage ratio (capital vs total assets)
Banks must meet minimum regulatory thresholds. Higher ratios indicate stronger financial health.
Example
A bank with $1 million in capital and $10 million in risk-weighted assets has a 10% capital ratio.
Capital Ratios vs Capital Requirements
- Capital ratios measure financial strength.
- Capital requirements define minimum thresholds banks must meet.
FAQs About Capital Ratios
Who sets capital ratio standards?
Regulators such as central banks and global frameworks (e.g., Basel standards).
Why are higher ratios better?
They provide a cushion against losses.
Do capital ratios affect lending?
Yes, they influence how much risk banks can take.
Related Terms
