Cooke Ratio

AAA

DEFINITION of 'Cooke Ratio'

A ratio that calculates the amount of capital a bank should have as a percentage of its total risk-adjusted assets. The calculation is used to determine a minimum capital adequacy standard that must be maintained by banks in case of unexpected losses.

From the First Basel Accord of 1988, the minimum requirement was determined to be a Cooke ratio of greater than or equal to 8%.

INVESTOPEDIA EXPLAINS 'Cooke Ratio'

The ratio was developed to ensure that all banks had enough capital set aside to lessen the risks on their respecitive assets. The main issue that critics have with the cooke ratio is how it put all borrowings from the bank on the same level, even though some were riskier than others.

In response to such concerns, the Cooke ratio was reviewed in 1999 and a new ratio was agreed to be created. In 2001, the McDonough ratio was created which gives banks greater control over how they calculate the ratio based on their own risk management procedures. The official changeover from Cooke ratio to McDonough ratio occured on December 31, 2006.

RELATED TERMS
  1. Capital

    1) Financial assets or the financial value of assets, such as ...
  2. McDonough Ratio

    A ratio that was developed during the Basel II conference by ...
  3. Central Bank

    The entity responsible for overseeing the monetary system for ...
  4. Loan

    The act of giving money, property or other material goods to ...
  5. Group of Ten - G10

    Eleven industrialized nations that meet on an annual basis to ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. What is the difference between payment netting and close-out netting?

    Both payment netting and close-out netting are methods of settlement between two or more parties, used to reduce risk exposure. ... Read Full Answer >>
  2. What is the minimum capital adequacy ratio that must be attained under Basel III?

    Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. The capital adequacy ratio measures a ... Read Full Answer >>
  3. How is portfolio variance reduced in Modern Portfolio Theory?

    According to modern portfolio theory, or MPT, portfolio variance can be reduced by diversifying a portfolio through the inclusion ... Read Full Answer >>
  4. What industries typically use delta hedging techniques?

    Those industries which are connected to the finance and commodity markets and are trading derivatives are the most likely ... Read Full Answer >>
  5. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  6. How does Basel III strengthen regulation and improve risk management of the global ...

    Basel III was a comprehensive set of regulations adopted in the wake of the 2008 financial crisis, designed to help protect ... Read Full Answer >>
Related Articles
  1. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  2. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  3. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  4. Fundamental Analysis

    Understanding Modern Portfolio Theory

    Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the owner’s risk tolerance.
  5. Investing Basics

    Explaining Idiosyncratic Risk

    Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.
  6. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  7. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  8. Professionals

    When Couples Have Different Risk Appetites

    Communication, compromise and frequent monitoring will lead to successful investing for spouses with different risk tolerances.
  9. Entrepreneurship

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  10. Entrepreneurship

    MLPs: Is Now the Right Time to Invest?

    Here's what you need to know about MLPs, those under-the-radar investment vehicles.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!