Changing the Game: New Methodology of Capital Adequacy Ratio

The Author holds a master's and a doctorate degree in finance. He works at one of the major Egyptian banks in credit and have more than 20 years of experience in this field. He worked on this research in an attempt to develop a new framework for calculating the capital adequacy in banks according to Basel standards. This paper went to propose a new frame work to help banks to calculate the value of all of the exposures that it faces and then apply a risk weighting depending on the type of risks. In simple terms, the proposed frameworks require that a certain amount of the bank’s regulatory capital must be allocated to every risk, or commitment made, by that bank. That allocation therefore restricts the amount of business that a bank may enter into or forces it to raise fresh capital. Therefore, the capital adequacy ratio require from each bank to determine three main ratios to allocate the adequate amount of capital should the bank hold and keep it as a reserve.