It stands for equity-asset ratio; a bank solvency ratio that aims to express a bank’s capital structure which relates a bank’s ability to cover fixed investments (fixed assets) with its own means or internal sources of financing (equity). It is a measure of bank’s financial strength.
This ratio is given by the following formula:
Equity-asset ratio = net worth/ total assets
This ratio measures the amount of total assets owned by the bank. These assets are financed by its own equity (net worth), rather than from external sources. It is the opposite of the debt-asset ratio.
Equity-asset ratio is a measure of a bank’s solvency (solvency indicator) that capitalizes on inputs from the balance sheet. The higher this ratio, the more solvent a bank is. The higher ratio makes a bank relatively safer in the event of liquidation, and reduces dependence on external funding. Well capitalized banks experience lower costs to become bankrupt and as such lower funding costs and less dependence on external funding. As a result, these banks can generate higher profits (better profitability).
EAR may also stand for effective annual interest rate or equivalent annual rate.
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