Capital ratio
In an attempt to prevent organisations such as banks from going bust too easily, regulators impose minimum capital requirements on them...
In an attempt to prevent organisations such as banks from going bust too easily, regulators impose minimum capital requirements on them: a bank should ensure that its own funds (capital that it can count as its own) as a proportion of "risk-weighted assets" (money it is owed by other people, allowing for non-payment risk) exceeds a regulatory target. A regulator can vary this target the riskier the bank, the higher the target.
A bank's "own funds" can be subdivided into different tiers, with "tier one" representing capital of the highest quality typically funds raised from issuing shares, combined with past profits. So suppose a bank issued $100 of shares ten years ago and has made $100 of profit over the last decade, its "own funds" would be $200.
Now assume that it is owed $1,600 as a result of lending to third parties and the regulator has set a tier one target of 10%. Well, 200/1,600 is 12.5%, which beats the target so all is well (hopefully).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Investors pull money from UK equities as government warns of “painful” Budget
The government’s post-election honeymoon period has been short-lived, and investors are shying away from UK equities as a result
By Katie Williams Published
-
Top global fintech companies to invest in
One British fintech hogs the headlines, but there are two top performers in the US. We explain where you should put your money
By David C. Stevenson Published