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How does Pragcap define banking capital ratios?

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The traditional definition seems to be applicable for a bank that operates on the “deposits create loans” money multiplier model. In fact all the Basel regulations are based around that where banks are supposed to set aside something like 8% of their capital to cover their deposits or something.

I think Cullen and others mentioned here that how much money a bank can lend is restricted by its “capital ratios”. So I was wondering how are you defining your capital ratios thats different to the traditional one?

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Posted by (Questions: 42, Responses: 53)
Posted on 09/14/2017 4:44 AM
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Capital ratios are defined by regulatory agencies. Not by portfolio managers who write blogs. 🙂

https://en.wikipedia.org/wiki/Basel_III

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Cullen Roche Posted by (Questions: 10, Responses: 1858)
Answered on 09/14/2017 2:50 PM
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here’s a pretty good, easy to understand explanation of capital and capital ratio calculations. It’s specific to NZ, but broadly applicable to any international bank. The risk weighting numbers might be a bit out of date, but it gives the right idea:

http://pages.stern.nyu.edu/~igiddy/articles/capital_adequacy_calculation.pdf

The concepts of capital and liquidity are quite often misunderstood. Here’s a short explanation of the difference:

https://www.federalreserve.gov/faqs/cat_21427.htm

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Posted by (Questions: 8, Responses: 100)
Answered on 09/15/2017 9:14 AM