Best’s Capital Adequacy Relativity (BCAR)
In the growing competitive business industry, each company is striving hard not to be left behind. New strategies and new methods of advertisement as well as fun and excitement are endorsed to consumers to entice them to be in their company.
How do these companies know their rating?
Best’s Capital Adequacy Relativity (BCAR) explains it all. This is the percentage that shows the measure of the company’s relative capital strength compared to its industry peer composite. An important component in every company to show the shape of its rating is through its BCAR which is calculated by dividing the company’s capital adequacy ratio by its capital adequacy ratio of the median of its industry close peer composite using the Best’s proprietary capital mode.
Knowing the companies BCAR will give the company a picture to be confident in the stability and ability to transact business the result shows a positive response. This result would show how the company could protect their financial status at loss. Top of the list of establishments that is highly affected are the financial banking institutions.
What is Capital Adequacy Ratio?
A capital adequacy ratio is the net required capital in relation to economic surplus. The ratio is to divide the current capital by its current risk. The calculation usually measured is the asset. This might sound confusing but the real risk being focused and measured here is the assets that might not be realized.
In case of financial bank institutions, countries usually abide by the Basel accords. This name was changed from its first name known as Basel I and its second name known as Basel II. This agreement states that banks should maintain a capital adequacy ratio of at least eight percent. And the latter explains the additional rules to government requiring them to check the standing of these institutions of whether they need a higher capital adequacy ratio.
The Basel accords over the years have been revised to be able to take more accounts and measure how strong the particular assets are. For instance, the same dollar amounts are tied to the bank and country’s governments as well as the unsecured loans of individuals. The former clearly shows a more valuable picture that the company will get the cash when assessing assets and risks.
In some calculation, the measurement of capital adequacy ratio will be by multiplying each asset to a standard risk weighting. A loan from a government owned company might be weighed at zero which means it is ignored effectively for risk assessment purposes. While a loan from a much less reliable source might be weighed 0.75, which means that 75% of the loan’s value is included in the risks ration when calculating the adequacy ratio.
It is of but importance that company owners should be mindful of their BCAR in order for the company to be in the operation. Assets and risks should be evaluated and properly equated to be able to prepare for the next move.