McDonough Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 464
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Definition: McDonough Ratio

Asset is anything which a company or organisation owns. In the same way, banks also possess assets like loans granted and financial instruments (Bonds, T-bills, Commercial papers). These assets might involve certain risk. In order to overcome or mitigate such risks in the case of any unexpected losses, the banks need to have an estimated minimum capital in their possession and this amount is in proportion with the risk the banks have to face.


It was introduced during the Basel II conference by the Basel Committee (on Banking Supervision).This ratio is a further enhancement of the Cooke ratio. The ratio, in addition to considering the risk, also allocates weight to each risk involved.


Mcdonough Ratio = Capital/ (Credit risk + Market risk + Operational Risk)


Credit risk arises out of the probability that the borrower might default.


Market risk is due to fluctuations in the market (applicable to currencies, Interest rate based products).


Operational risk is due to inefficiencies or technical failure in the organisation.

 

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