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How to Calculate the Primary Capital Asset Ratio for a Bank

Original post by Bryan Keythman of Demand Media

A primary capital ratio measures a bank's risk.

A bank’s primary capital ratio measures its primary capital as a percentage of total assets. Primary capital consists of money from sources such as common stock and preferred stock. Unlike other sources of money that a bank must pay back, such as money from customer deposits, primary capital is considered more permanent. A higher primary capital ratio means a bank has a greater financial cushion in case its business suffers losses. You can calculate a bank’s primary capital ratio using information from its annual report.

Step 1

Find a bank’s balance sheet in its 10-K annual report. You can obtain this report from the investor relations section of the bank’s website or from the U.S. Securities and Exchange Commission’s EDGAR online database.

Step 2

Identify the amounts of total stockholders’ equity, total assets and loan-loss reserves on the balance sheet. The amount of loan-loss reserves is money a bank sets aside in case some of its loan borrowers cannot repay. For example, assume a bank has $100,000 in total stockholders’ equity, $1.5 million in total assets and $10,000 in loan loss reserves.

Step 3

Add together total stockholders’ equity and loan-loss reserves to calculate primary capital. In this example, add $100,000 in total stockholders’ equity and $10,000 in loan-loss reserves to get $110,000 in primary capital.

Step 4

Divide primary capital by total assets. Multiply your result by 100 to calculate the primary capital ratio. In this example, divide $110,000 by $1.5 million to get 0.07. Multiply 0.07 by 100 to get a 7 percent primary capital ratio.


Tips & Warnings

  • Compare a bank’s primary capital ratio with those of its competitors to compare its risk level with its peers.



About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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