DEFINITION of 'Risk-Adjusted Capital Ratio'

A measure of a financial institutions that compares total adjusted capital (TAC) to the institutions risk-weighted assets. There are many variations of risk-adjusted capital ratios, depending on how the analyst defines capital. Risk-adjusted capital ratios are used to assess the capital adequacy of a financial institution. Analyzing these ratios can help determine whether a bank has enough capital to withstand a downturn in the economy.

BREAKING DOWN 'Risk-Adjusted Capital Ratio'

For instance, Standard and Poor's calculates adjusted common equity by taking common shareholder's equity, and adding minority interest-equity and subtracting items such as dividends, revaluation reserves, goodwill, tax loss carry forwards, interest-only strips and other adjustments. Then, preferred stock and general reserves are added to this adjusted common equity to get their total adjusted capital.

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