Question

Analyse the roles of the gearing ratio and the risk-assets ratio in banking regulation.

Answer 1

Gearing ratio is the financial ratio which will be comparing shareholders equity to the companies that in a way to access the company's amount of leverage and financial stability.it is used as a measure to show how much of the company's operation are funded using debt against the funding received from the shareholders equity.

Risk asset ratio will be measuring the amount of the bank total regulatory capital in relation to the amount of the risk it is taking and it is used that all bank must be ensuring that a reasonable proportion of their risk is covered by the permanent capital.

Gearing ratio and risk asset ratio play a very important role in banking regulation because they will be helping the regulatory organisation in order to control how much fund the commercial banks can lend, and it will be dependent upon various kinds of leverage ratios which are also known as gearing ratio and they will be trying to monitor the banks because banks are the highly leveraged Organisation in any country and these banks are often prone to any kind of economic cycle change so they need to be regulated well in order to maintain the flow of money into the economy in a uniform basis so they will be regulated appropriately so that they do not default in adverse economic scenario

Gearing ratio will be telling about amount of leverage the bank has undertaken and how much the bank is lending that money in order to make profit and risk asset ratio will also be giving an appropriate idea about the risk which has been undertaken by the bank in order to maximize the overall rate of return and these leverage ratio and risk asset ratio will be very important in order to control any kind of default by banks so regulatory organisations are always looking onto these factors in order to control fluctuations in the cash flows and prevention of default of the commercial banks which can be helpful in order to contain any kind of default.