Capital Ratio

In the text, we discuss a number of financial ratios. These are only some of the most common ratios and, in fact, there are many different financial ratios. For example, the capital ratio, or capital adequacy ratio, is used by banks, regulators, and investors to determine a bank's ability to meet its liabilities. The ratio is calculated as the bank's core capital divided by its risk weighted assets. Banks will soon be required to reveal more about how the calculation is done by the bank. As with any ratio, it is possible to manipulate the outcome. For example, even though Deutsche Bank lost €2.5 billion ($3.4 billion), its capital ratio increased because the bank changed the method it used to calculate the risk weighted assets. The moral of the story: The interpretation of any ratio depends on how it is calculated. To understand the ratio, you must know exactly how the numbers used in the calculation are derived.