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
-
Private school fees soar and VAT threat looms – what does it mean for you?
Rising private school fees could see more than one in five parents pull their children out of their current school. Before you remortgage, move house or look to grandparents for help, here’s what you need to know.
By Katie Williams Published
-
Best and worst UK banks for online banking revealed
When it comes to keeping your money safe, not all banks are equal. We reveal the best and worst banks for online banking when it comes to protecting your money from scams
By Oojal Dhanjal Published