Banking ratios significantly determine the financial position of your bank. Mainly, you need to know Capital and Liquidity ratios. Capital ratios measure your equity capital to total assets. Liquidity ratios, on the other hand, determine your bank’s capability to meet the needs of borrowers, such as credit and deposit withdrawals.
Another important banking ratio you should take note of is the Loan Loss Reserve ratio. This handles the losses which might occur based on the loans underwritten and them going bad. As other ratios, you should balance this out in order to maintain an effective banking flow.
Next, Tier 1 capital examines the bank’s financial strength through the view of a regulator. Core capital consists of Tier 1, which helps determine if your bank can effectively keep up with consumer needs. Tier 1 Capital is the core capital and consists of shareholder equity. This consists also of retained earnings and profits, subtracting any losses. Regulators have since allowed several other instruments, other than common stock, to count in tier one capital. These instruments are unique to each national regulator, but are always close in nature to common stock. These are commonly referred to as upper tier one capital.
Tier 2 capital also measures your bank’s financial strength; it is also known as supplemental capital. It consists of undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. Lots of time you will also see goodwill on the books recorded on Tier 2 capital.
In line with these banking facts, you should understand what factors to consider in your banking balance sheets. The natural accounting trend of assets, liabilities, and your bank capitals affect the progress of your bank. Take note of revenue and expenses that your bank may incur with the ratios in effect. You should be able to sustain your bank if you can analyze long term progression. Usually, you can secure this with a management firm to secure your continued progress.
Overall, banking can be effectively done through the right measures taken. Always take note of your banking ratios should you wish to obtain the most beneficial trend or pattern. Banking like any other business, requires strategy and proper market trend analysis to get things truly rolling. One of the biggest advantage of bank to any other business is the leverage to the capital what you can derive and the scalability. Beauty of the game is in the vision and systematic planning and implementation.
Robin Trehan B.A, MIB, MBA