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Capital Adequacy Ratio (CAR)

The Capital Adequacy Ratio (CAR) is a measure used by banks to determine whether they have enough capital to absorb potential losses and continue operating during periods of financial stress. It is calculated by dividing a bank’s capital by its risk-weighted assets. CAR ensures that a bank has sufficient capital to cover its liabilities and protect depositors and investors in case of financial difficulties.

Example

A bank with a CAR of 12% has enough capital to cover 12% of its risk-weighted assets, which may exceed the minimum regulatory requirement of 8%.

Key points

• CAR measures a bank’s capital relative to its risk-weighted assets.

• Ensures that banks have enough capital to absorb potential losses.

• Regulatory bodies set minimum CAR requirements to promote financial stability.

Quick Answers to Curious Questions

It ensures that banks have sufficient capital to withstand financial losses and continue operating, protecting depositors and the overall financial system.

CAR is calculated by dividing a bank’s capital by its risk-weighted assets, providing a ratio that reflects the bank’s financial health.

If a bank’s CAR falls below the minimum requirement, it may face regulatory actions, such as restrictions on lending or capital raising to restore its financial stability.