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    Capital Adequacy Ratio

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    Sanam Ansari
    The capital adequacy ratio (CAR) is a measurement of a bank's capital expressed as a percentage of its risk-weighted assets. CAR includes Tier 1 capital, which can absorb losses without requiring the bank to cease operations, and Tier 2 capital, which provides protection in the event of liquidation. The ratio is calculated by dividing a bank's Tier 1 and Tier 2 capital by its risk-weighted assets, which are determined by evaluating the credit risk of a bank's loans and investments. Maintaining an adequate CAR protects depositors and promotes financial system stability.

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    Capital Adequacy Ratio

    Uploaded by

    Sanam Ansari
    56 views2 pages
    The capital adequacy ratio (CAR) is a measurement of a bank's capital expressed as a percentage of its risk-weighted assets. CAR includes Tier 1 capital, which can absorb losses without requiring the bank to cease operations, and Tier 2 capital, which provides protection in the event of liquidation. The ratio is calculated by dividing a bank's Tier 1 and Tier 2 capital by its risk-weighted assets, which are determined by evaluating the credit risk of a bank's loans and investments. Maintaining an adequate CAR protects depositors and promotes financial system stability.

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    The capital adequacy ratio (CAR) is a measurement of a bank's capital expressed as a percentage of its risk-weighted assets. CAR includes Tier 1 capital, which can absorb losses without requiring the bank to cease operations, and Tier 2 capital, which provides protection in the event of liquidation. The ratio is calculated by dividing a bank's Tier 1 and Tier 2 capital by its risk-weighted assets, which are determined by evaluating the credit risk of a bank's loans and investments. Maintaining an adequate CAR protects depositors and promotes financial system stability.

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    56 views2 pages

    Capital Adequacy Ratio

    Uploaded by

    Sanam Ansari
    The capital adequacy ratio (CAR) is a measurement of a bank's capital expressed as a percentage of its risk-weighted assets. CAR includes Tier 1 capital, which can absorb losses without requiring the bank to cease operations, and Tier 2 capital, which provides protection in the event of liquidation. The ratio is calculated by dividing a bank's Tier 1 and Tier 2 capital by its risk-weighted assets, which are determined by evaluating the credit risk of a bank's loans and investments. Maintaining an adequate CAR protects depositors and promotes financial system stability.

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    Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets

    Ratio (CRAR), is the ratio of bank's CAR to ensure that it can absorb a reasonable
    amount of loss and complies with statutory Capital requirement

    It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk


    weighted credit exposures.
    The enforcement of regulated levels of this ratio is intended to protect depositors and
    promote stability and efficiency of financial systems around the world.
    Two types of capital are measured: tier one capital, which can absorb losses without a
    bank being required to cease trading, and tier two capital, which can absorb losses in
    the event of a winding-up and so provides a lesser degree of protection to depositors.

    What Is the Capital Adequacy Ratio (CAR)?


    The capital adequacy ratio (CAR) is a measurement of a bank's available
    capital expressed as a percentage of a bank's risk-weighted credit exposures.
    The capital adequacy ratio, also known as capital-to-risk weighted assets
    ratio (CRAR), is used to protect depositors and promote the stability and
    efficiency of financial systems around the world. Two types of capital are
    measured:
    Tier One Capital :- which can absorb losses without a bank being required to
    cease trading,
    Tier Two Capital :- which can absorb losses in the event of a winding-up and
    so provides a lesser degree of protection to depositors.

    The Formula of CAR is

    Tier One Capital + Tier two Capital


    ___________________________
    Risk Weighted Assets

    How the Capital Adequacy Ratio Is Calculated


    The capital adequacy ratio is calculated by dividing a bank's capital by its risk-
    weighted assets. The capital used to calculate the capital adequacy ratio is
    divided into two tiers.

    Tier-1 Capital
    Tier-1 capital, or core capital, consists of equity capital, ordinary share capital,
    intangible assets and audited revenue reserves. Tier-1 capital is used to
    absorb losses and does not require a bank to cease operations. Tier-1 capital
    is the capital that is permanently and easily available to cushion losses
    suffered by a bank without it being required to stop operating. A good example
    of a bank’s tier one capital is its ordinary share capital.

    Tier-2 Capital
    comprises unaudited retained earnings, unaudited reserves and general loss
    reserves. This capital absorbs losses in the event of a company winding up or
    liquidating. Tier-2 capital is the one that cushions losses in case the bank is
    winding up, so it provides a lesser degree of protection to depositors and
    creditors. It is used to absorb losses if a bank loses all its Tier-1 capital.

    The two capital tiers are added together and divided by risk-weighted assets
    to calculate a bank's capital adequacy ratio. Risk-weighted assets are
    calculated by looking at a bank's loans, evaluating the risk and then assigning
    a weight. When measuring , adjustments are made to the value of assets
    listed on a lender’s balance sheet.

    All of the loans the bank has issued are weighted based on their degree
    of credit risk . For example, loans issued to the government are weighted at
    0.0%, while those given to individuals are assigned a weighted score of
    100.0%.

    Risk-weighted assets are used to determine the minimum amount of capital


    that must be held by banks and other institutions to reduce the risk
    of insolvency. The capital requirement is based on a risk assessment for each
    type of bank asset. For example, the loan is secured by a letter of credit is
    considered to be riskier and requires more capital than a mortgage loan that is
    secured with collateral.

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