Commercial Banking Notes

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  • Topic: Basel II, Operational risk, Capital requirement
  • Pages : 7 (1832 words )
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  • Published : April 30, 2011
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Capital adequacy ratio (CAR)
also called Capital to Risk (Weighted) Assets Ratio (CRAR)[1], is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss [2] and are complying with their statutory Capital requirements.

Capital (Finance)

In a fundamental sense, capital consists of anything that can enhance a person's power to perform economically useful work. A stone or an arrow is a capital for a caveman who can use it as a hunting instrument. A road is a capital for inhabitants of a city. A personal computer is a capital for a student.

In economics, capital, capital goods, or real capital are the factor of production used to create goods or services that are not themselves significantly consumed (though they may depreciate) in the production process. Capital goods may be acquired with money or financial capital. At any moment in time, total physical capital may be referred to as the capital stock, a usage different from the same term applied to a business entity.

Liquidity Ratios

What Does Liquidity Ratios Mean?
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.   

Investopedia explains Liquidity Ratios
Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

Leverage Ratio

What Does Leverage Ratio Mean?
1. Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

2. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. [pic]

Investopedia explains Leverage Ratio
1. The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a company has $10M in debt and $20M in equity, it has a debt-to-equity ratio of 0.5 ($10M/$20M).

2. Companies with high fixed costs, after reaching the breakeven point, see a greater increase in operating revenue when output is increased compared to companies with high variable costs. The reason for this is that the costs have already been incurred, so every sale after the breakeven transfers to the operating income. On the other hand, a high variable cost company sees little increase in operating income with additional output, because costs continue to be imputed into the outputs. The degree of operating leverage is the ratio used to calculate this mix and its effects on operating income

Basel I (The 1988 Capital Accord)

What Does Basel I Mean?
A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based...
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