Capital Ratio

Capital ratios are critical indicators of a bank's financial health and stability, reflecting the relationship between its capital and risk-weighted assets. The most common capital ratios include the Tier 1 capital ratio, the Tier 2 capital ratio, and the total capital ratio. These ratios are used to assess a bank's ability to absorb losses and withstand financial shocks.

Regulatory authorities, such as the Basel Committee on Banking Supervision, set minimum capital requirements to ensure that banks maintain sufficient capital to cover their risks. Tier 1 capital includes core equity capital, while Tier 2 capital consists of supplementary capital, such as subordinated debt and hybrid instruments. A higher capital ratio indicates a stronger financial position and greater resilience against potential losses.

1. A bank maintaining a Tier 1 capital ratio above regulatory requirements to ensure financial stability.
2. Regulatory stress tests evaluating a bank's capital ratios under adverse economic scenarios.
3. A bank increasing its capital ratio by retaining earnings and issuing new equity.