What is the Cooke Ratio
The Cooke Ratio is a capital adequacy ratio that expresses the amount of capital a bank has as a percentage of its total risk-adjusted assets. The ratio, named for Peter Cooke of the Bank of England, was used to determine whether the bank has enough capital to weather unexpected losses. The minimally adequate Cooke Ratio was determined by the 1988 Basel Accord (Basel I) to be 8%. Basel I was an agreement reached by central banks and regulatory authorities of G-10 countries that focused on credit risk and risk-weighting of bank assets.
BREAKING DOWN Cooke Ratio
In 2007, the Cooke Ratio was replaced with the McDonough Ratio. Critics of Basel I and the Cooke Ratio noted that they failed to adequately differentiate among risks and did not take into account the introduction of risk mitigation efforts that had emerged since Basel I. In response, the Basel II Agreement, published in 2004, replaced the Cooke Ratio with the McDonough Ratio. The ratio is named after William McDonough, who was head of the New York Federal Reserve Bank and chaired the Basel II committee. The McDonough Ratio gives banks greater control over how they calculate the ratio, based on their own risk management procedures.