The capital to risk-weighted assets ratio, or capital adequacy ratio, of a bank measures its financial stability. You can calculate a bank's capital to risk-weighted assets ratio in Microsoft Excel once you determine its tier 1 and tier 2 capital and its risk-weighted assets.
First, let's define our variables. T A bank's tier 1 capital is its core capital, which is used when it needs to absorb losses without ceasing its operations. A bank's tier 2 capital is its supplementary capital used to absorb losses if a bank is winding up its assets. A bank's risk-weighted assets are its assets, weighted by their riskiness.
Calculate a bank's capital to risk-weighted assets ratio in Excel by first entering "Tier 1 Capital" and "Tier 2 Capital" into cells A2 and A3. Next, enter "Risk-Weighted Assets" into cell A4 and "Capital to Risk-Weighted Assets Ratio" into cell A5.
Assume you want to compare the ratios between two banks, Bank A and Bank B. Enter "Bank A" and "Bank B" into cells B1 and C1. Then, enter the corresponding values for Bank A's tier 1 capital, tier 2 capital and risk-weighted assets into cells B2 through B4. Next, enter the corresponding values for Bank B's tier 1 capital, tier 2 capital and risk-weighted assets into cells C2 through C4.
Bank A's resulting capital to risk-weighted assets ratio is calculated by entering the formula "=(B2+B3)/B4)" into cell B5. Bank B's resulting capital adequacy ratio is calculated by entering "=(C2+C3)/C4)" into cell C5.
In short, the capital to risk-weighted assets ratio is calculated by adding a bank's tier 1 capital and tier 2 capital and dividing the total by its total risk-weighted assets.