McDonough Ratio

AAA

DEFINITION of 'McDonough Ratio'

A ratio that was developed during the Basel II conference by the Basel Committee on Banking Supervision. The ratio has evolved out of the Cooke ratio, which was originally developed during Basel I in 1998. Improvements were made to update the ratio because the development of new financial instruments were creating problems for determining the risk carried by banks.

INVESTOPEDIA EXPLAINS 'McDonough Ratio'

The McDonough ratio was named after William McDonough, the head of the Basil Committee. Although the McDonough ratio sets its benchmark at the same percent value as the Cooke ratio, the overall calculation has been improved. The major difference comes in the calculation of a bank's risk-weighted assets. The Cooke ratio did not give different weights to borrowers of differing quality. This was changed under the McDonough ratio, which used the probability of default and the expected loss from default to assign varying weights to assets in the denominator.

RELATED TERMS
  1. Capital

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

    1. A resource with economic value that an individual, corporation ...
  3. Loan

    The act of giving money, property or other material goods to ...
  4. Solvency

    The ability of a company to meet its long-term financial obligations. ...
  5. Basel Committee On Bank Supervision

    A committee established by the central bank governors of the ...
  6. Cooke Ratio

    A ratio that calculates the amount of capital a bank should have ...
Related Articles
  1. What Are Central Banks?
    Personal Finance

    What Are Central Banks?

  2. An Overview Of Corporate Bankruptcy
    Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

  3. What Is The Bank For International Settlements?
    Personal Finance

    What Is The Bank For International Settlements?

  4. Can Investors Trust Official Statistics?
    Economics

    Can Investors Trust Official Statistics?

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center