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.

RELATED TERMS
  1. McDonough Ratio

    A ratio that was developed during the Basel II conference by ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  3. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  4. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  5. Key Ratio

    A mathematical ratio that illustrates and summarizes the current ...
  6. Risk-Adjusted Capital Ratio

    A measure of a financial institutions that compares total adjusted ...
Related Articles
  1. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  2. Personal Finance

    Explaining the Tier 1 Leverage Ratio

    The Tier 1 leverage ratio measures a bank’s core capital against its total assets.
  3. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  4. Personal Finance

    Explaining Risk-Weighted Assets

    Risk-weighted assets is a banking term that refers to a method of measuring the risk inherent in a bank’s assets, which is typically its loan portfolio.
  5. Investing

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  6. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  7. Investing

    Do Your Investments Have Short-Term Health?

    If a company is strong enough to survive tough times, it is more likely to provide long-term value.
  8. Investing

    Texas Ratio Rounds Up Bank Failures

    This measure can help investors spot potential trouble in a bank's financials. Find out how.
  9. Personal Finance

    Calculating the Tier 1 Capital Ratio

    The Tier 1 capital ratio is a measure of a depository financial institution’s financial health and capital adequacy.
  10. Investing

    Key Financial Ratios to Analyze Investment Banks

    Find out which financial ratios are most useful when analyzing an investment bank, and why tracking capital efficiency is especially important.
RELATED FAQS
  1. What does it mean when a company has a high capital adequacy ratio?

    Learn about the capital adequacy ratio, what the ratio measures, how it is calculated and what it means when a bank has a ... Read Answer >>
  2. What measures can be used to evaluate the capital adequacy of a bank?

    Examine some of the different financial measurements that are most commonly used to assess capital adequacy within the banking ... Read Answer >>
  3. What is the difference between the capital adequacy ratio and the leverage ratio?

    Explore what differentiates the capital adequacy ratio from any one of several leverage ratios used for equity evaluation ... Read Answer >>
  4. What is the difference between the capital adequacy ratio vs. the solvency ratio?

    Understand the different applications for using the capital adequacy ratio and the solvency ratio, which are both equity ... Read Answer >>
  5. How do stock dividends affect the retained earnings account?

    Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >>
  6. What ratios are most commonly used to judge working capital management?

    Learn about the various working capital ratios that investors and analysts consider when evaluating a company's financial ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center