Methods Of Calculating Capital Adequacy In Commercial Banks: A Comparison Of International And National Practices

Abstract

Capital adequacy ratios underpin bank solvency oversight by linking the quality and quantity of regulatory capital to risk-weighted assets (RWA). Although the Basel framework provides a common architecture, methods for calculating credit, market, and operational risk capital vary across standardized and internal model approaches and are implemented differently by jurisdictions, which affects comparability, cyclicality, and supervisory use. This article analyzes the methodological core of capital adequacy measurement—covering the composition of capital, the computation of RWAs under standardized and internal ratings-based (IRB) approaches, the leverage ratio backstop, and Pillar 2 overlays—and contrasts international prescriptions with typical national practices in advanced and emerging markets. The discussion highlights how choices about risk weights, model approvals, data quality, and transitional arrangements shape reported ratios and risk sensitivity. The paper concludes that credible convergence requires robust risk-data governance, transparent model validation, proportionate use of standardized backstops such as the output floor, and clear disclosure that bridges accounting and prudential views of loss.