The risky asset conversion ratio (RACR) is a measure of the riskiness of a bank’s assets, taking into account the credit risk, market risk, and operational risk of each asset. The RACR is calculated by dividing the risk-weighted assets (RWA) by the total assets of the bank. The RWA is the sum of the risk-weighted values of each asset, which are determined by applying different risk weights according to the Basel III framework. The higher the RACR, the more risky the bank’s assets are, and the more capital the bank needs to hold to cover potential losses.
Procedures
To calculate the RACR in Excel, we need to follow these steps:
- Obtain the data for the bank’s total assets and the risk weights for each asset category. The risk weights can be found in the Basel III regulations or from the bank’s own internal models.
- Assign each asset to its corresponding asset category and multiply it by its risk weight to get the risk-weighted value of each asset.
- Sum up the risk-weighted values of all assets to get the RWA.
- Divide the RWA by the total assets to get the RACR.
Comprehensive Explanation
To illustrate the calculation of the RACR in Excel, let us consider a hypothetical scenario where a bank has the following assets:
| Asset Category | Asset Value | Risk Weight |
|---|---|---|
| Cash | 100 | 0% |
| Government Bonds | 200 | 20% |
| Corporate Bonds | 300 | 50% |
| Loans | 400 | 100% |
| Total Assets | 1000 | N/A |
Using the formula for the RACR, we can calculate the RWA and the RACR as follows:
| Asset Category | Asset Value | Risk Weight | Risk-Weighted Value |
|---|---|---|---|
| Cash | 100 | 0% | 0 |
| Government Bonds | 200 | 20% | 40 |
| Corporate Bonds | 300 | 50% | 150 |
| Loans | 400 | 100% | 400 |
| Total Assets | 1000 | N/A | 590 |
RACR = RWA / Total Assets = 590 / 1000 = 0.59
The RACR of the bank is 0.59, which means that the bank’s assets are moderately risky and the bank needs to hold sufficient capital to meet the regulatory requirements.
