Question

Detail and give examples of two (2) financial ratios often used to provide a direct measure of a commercial bank’s credit risk exposure. (200 words)

Answer 1

A. Capital adequacy ratio- capital adequacy ratio is a measurement of available percentage of a bank capital expressed as a percentage of risk weighted credit exposure

Capital adequacy ratio= (Bank capital / risk weighted assets)

Capital adequacy ratio is providing the total capital of the bank in relation to dealing with the risk associated with its operation and it will provide the depositors and other stakeholders about an idea about how risky the bank is in respect to the asset it is holding and the overall assets are also divided into tier 1 and tier 2 so there is a proper and adequate differentiation of various assets which are held by the bank according to their risk waiting and it is providing idea about the overall credit quality and the assets quality of the bank.

B. Deposits to assets ratio is another ratio which can be used in order to determine the overall deposits the bank is having in its books in respect to its overall asset so the overall deposits to assets ratio will be providing a better idea about the quality of deposits the bank is holding in respect to its Assets and it will be providing a better idea about the solvency of the business in the long run