McDonough Ratio

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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.

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