Cooke Ratio

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%.

BREAKING DOWN '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.

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