Capital ratio

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.

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