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. Solvency

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

    A committee established by the central bank governors of the ...
  4. Central Bank

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

    The act of giving money, property or other material goods to ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. What are some of the more common types of regressions investors can use?

    The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>
  2. What types of assets produce negative portfolio variance?

    Assets that have a negative correlation with each other produce negative portfolio variance. Variance is one measure of the ... Read Full Answer >>
  3. When is it better to use systematic over simple random sampling?

    Under simple random sampling, a sample of items is chosen randomly from a population, and each item has an equal probability ... Read Full Answer >>
  4. What are some common financial sampling methods?

    There are two areas in finance where sampling is very important: hypothesis testing and auditing. The type of sampling methods ... Read Full Answer >>
  5. How can I measure portfolio variance?

    Portfolio variance measures the dispersion of returns of a portfolio. It is calculated using the standard deviation of each ... Read Full Answer >>
  6. How do you calculate GDP with the income approach?

    The income approach to measuring gross domestic product (GDP) is based on the accounting reality that all expenditures in ... 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. Economics

    Explaining the Liquidity Coverage Ratio

    The liquidity coverage ratio requires banks and other financial institutions to hold enough cash and liquid assets on hand to weather market stress.
  5. Fundamental Analysis

    Calculating Valuation

    Valuation is the process of determining what an asset is worth.
  6. Economics

    Will the Selloff in China Hurt the Global Economy?

    Though China is the world’s second largest economy, its volatility in the stock market is unlikely to have an impact on the global or Chinese economy.
  7. Fundamental Analysis

    Understanding Qualitative Analysis

    Qualitative analysis is a general term describing the non-mathematical scrutiny used by investors and managers to make investment and business decisions.
  8. Economics

    Signs The U.S. Recovery Is Solid

    Many market observers lately have been making some pretty pessimistic evaluations of the U.S. economy, declaring that it’s stagnating and soft.
  9. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  10. Fundamental Analysis

    Explaining the Empirical Rule

    The empirical rule provides a quick estimate of the spread of data in a normal statistical distribution.

You May Also Like

Hot Definitions
  1. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  2. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  3. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  4. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  5. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  6. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
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!