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Finance Formulas / July 18, 2018 / Alia Marquez

To force banks to increase capital buffers, and ensure they can withstand financial distress before they become insolvent, Basel III rules would tighten both tier-1 capital and risk-weighted assets (RWAs). The equity component of tier-1 capital has to have at least 4.5% of RWAs. The tier-1 capital ratio has to be at least 6%. Basel III also introduced a minimum leverage ratio, with Tier-1 capital must be at least 3% of total assets, and more for global systemically important banks that are too big to fail. The Basel III rules have yet to be finalized due to an impasse between the U.S. and Europe.

The debt-to-equity ratio (DE) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage. The two components are often taken from the firm's balance sheet or statement of financial position (so-called book value), but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially.

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