The capital-to-risk weighted assets ratio, also known as the capital adequacy ratio, is one of the most important financial ratios used by investors and analysts. The ratio measures a bank's financial stability by measuring its available capital as a percentage of its risk-weighted credit exposure. The purpose of the ratio is to help banks protect their 澳洲幸运5官方开奖结果体彩网:depositors and promote financial health.

The capital-to-risk-weighted assets ratio for a bank is usually expressed as a percentage. The current minimum requirement of the capital-to-risk weighted assets ratio, under 澳洲幸运5官方开奖结果体彩网:Basel III, is 10.5%, including the conservation buffer. Having a global standard promotes the stability and effi▨ciency of worldwide financial systems and banks.

Formula fo♍r the Capital-to-Risk Weighted Assets Ratio

The formula to calculate a bank's capital-to-risk weighted assets ratio🐟 is:

$\textbf{Capital-To-Risk Weighted Assets=}\frac{\textbf{Tier 1 Capital+Tier 2 Capital}}{\textbf{Risk-Weighted Assets}}$Capital-To-Risk Weighted Assets=Risk-Weighted AssetsTier 1 Capital+Tier 2 Capital​

澳洲幸运5官方开奖结果体彩网:Tier 1 capital is the core capital of a bank; the capital it needs to absorb losses without stopping operations. It includes equity and disclosed reserves. 澳洲幸运5官方开奖结果体彩网:Tier 2 capital is supplementary capital that is less secure than tier 1 capital. It includes undisclosed reserves and subordinated debt. A bank's 澳洲幸运5官方开奖结果体彩网:risk-weighted assets are its assets weighted by their riskiness used to determine the minimum amount of capital that must be held to reduce its risk of insolvency. These items can all be found on a bank's financial statements.

Example of the Capital-to-Risk Weighted Ass🐎ets Ratio

Assume bank ABC has tier 1 one capital of $10 million and tier 2 capital of $5 million.🌄 It has $400 million in risk-weighted assets. The resulting capital to risk-weighted assets ratio is 3.75%:

 $\text{Capital-to-risk weighted assets} = \frac{\$10 \text{MM} + \$5 \text{MM}} {\$400 \text{MM}} \times 100\%$Capital-to-risk weighted assets=$400MM$10MM+$5MM​×100%

With a ratio significantly below 10.🅺5%, bank ABC has not met the minimum r🐠equirement of capital-to-risk weighted assets. The bank is holding too much in risk-weighted assets, in comparison with its tier 1 and tier 2 capital.

On the other hand, assume bank DEF has tier 1 capital of $15 million, tier 2 capital of $10 million, and $75 million in risk-weighted assets. Bank DEF's resulting capital-to-risk weighted assets ratio is 33%:

 $\text{Capital-to-risk weighted assets} = \frac{\$15 \text{MM} + \$10 \text{MM}} {\$75 \text{MM}} \times 100\%$Capital-to-risk weighted assets=$75MM$15MM+$10MM​×100%

Therefore, bank DEF is financially stable, likely to be able to absorb itsꦕ lo𝓀sses.

Explain Like I'm Five

Banks are required to maintain an amount of capital in order to reduce risk to the financial system. If a borrower defaults on their loan payments to the bank, the bank uses its reserves to cover its losses. If a bank does not have enough reserves, it might default on its own payme✱nts and cause further harm to other banks.

After the 2008 financial crisis, the world's central banks agreed to set a universal standard for capital requirements. This standard is the capital-to-risk weighted assets ratio: It measures the value of a bank's assets, as a percentage of how much money it has loaned out and how risky those loans are. As of 2025, that minimum ratio is 10.5%.

The Bottom Line

The capital-to-risk weighted assets ratio will help determine whether or not a bank has enough capital to take on any losses before becoming 澳洲幸运5官方开奖结果体彩网:insolvent and losing depositor funds. It's important for a bank to monitor this ratio and adhere to regulatory requirements to avoid going insolvent and to protect its clients and the laജrger economy as a whole.