The ratio of the capital of a bank to its risk weighted assets. The weights applied to the assets are determined by risk-sensitivity ratios as defined by the relevant Basel Agreement. Capital ratios are measures of the capital strength of a bank, and are used by regulatory agencies to assess the resilience of a bank to losses and compliance with regulations. The capital of a bank can be defined in different ways. Tier 1 measures core capital and consists of share capital and disclosed reserves, but may also include non-redeemable non-cumulative preferred stock. Tier 2 includes supplementary capital such as undisclosed reserves, revaluation reserves, general provisions, hybrid instruments, and subordinated term debt. See also Basel Agreement.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|