Problems Arising In The Calculation Of Capital Adequacy Ratios And Ways To Overcome Them

Abstract

Capital adequacy ratios remain the cornerstone of bank solvency oversight, yet their calculation is beset by methodological, data, and governance challenges that can distort risk-weighted assets (RWA) and undermine comparability across institutions and jurisdictions. This article examines pervasive issues encountered when computing capital adequacy—spanning model risk in internal ratings-based (IRB) approaches, procyclicality, accounting–regulatory misalignments under IFRS 9, treatment of off-balance-sheet items, market and operational risk revisions, leverage ratio interactions, and consolidation boundaries. Using a comparative-analytical method grounded in international regulatory texts and supervisory guidance, we discuss how these frictions propagate measurement error into both numerator and denominator of capital ratios. We then outline practical remedies: strengthened risk-data aggregation and lineage, rigorous model governance and validation, conservative overlays and floors, automated RWA engines with reconciliation controls, stress testing that integrates accounting expected-loss dynamics, transparent Pillar 2 frameworks, and enhanced disclosure practices. The paper argues that sustainable improvement depends on aligning data architecture and model oversight with evolving Basel standards, while maintaining a calibrated balance between risk sensitivity and simplicity to preserve comparability and resilience.