Question

Based on the following balance sheet, calculate the bank’s capital ratio. Explain why the ratio is used.

Assets		Liabilities
Required Reserves	$8 million	Checkable deposits	$100 million
Excess reserves	$3 million	Bank capital	$6 million
T-bills	$45 million
Commercial loans	$50 million

Answer 1

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Answer

Capital ratio is also known as the capital adequacy ratio .It measures the amount of a capital a bank has as a percentage of its total assets . This ratio is used to measure the financial soundness of the banks . It is often calculated to ascertain the amount of loss a Bank can sustain . It is a very crucial ratio calculated by National regulators of the Banks. It also gives an indication of the the quality of risk management policy pursued by the Banks . It measures the ability to absorb the capital shock.

Total assets = Requires reserves+ Excess reserves+ T bills + commercial loans
= 8+3+45+50
= 106 million $

Bank capital = 6 million $

Capital Ratio = Capital /total assets *100
= 6 million / 106 million *100
= 5.66 %