Capital Adequacy

Overview

Capital adequacy refers to a banks ability to absorb losses. Losses can come from various sources, but are typically viewed as coming from credit losses. A bank absorbs losses through its shareholders equity, and when its equity goes to zero, it is techincally insolvent, even though the regulators would probably wind the bank down before then. Therefore, the likelihood of a bank becoming insolvent is directly tied to the size of the banks equity.

Call Report Ratios

When analyzing a banks capital position from its financial statements and call reports, analysts often look at the following ratios.

• NPL Ratio - Nonperforming loans to total loans
• nonperforming assets to total loans
• NPL Coverage ration - Loan loss reservers to nonperforming loans