Definition
The Capital Adequacy Ratio (CAR) is a measure of a bank’s financial strength and stability. It is calculated by dividing a bank’s total capital by its total risk-weighted assets. The ratio is expressed as a percentage and is used to assess a bank’s ability to absorb losses and remain solvent.
Importance
The CAR is an important measure of a bank’s financial health and stability. It is used by regulators to ensure that banks have sufficient capital to cover their risks and remain solvent. Banks must maintain a minimum CAR in order to remain compliant with regulatory requirements. A high CAR indicates that a bank is well-capitalized and has a strong financial position.
Example
For example, if a bank has total capital of $100 million and total risk-weighted assets of $500 million, its CAR would be 20%. This means that the bank has $20 of capital for every $100 of risk-weighted assets.
Table
Total Capital $100 million
Total Risk-Weighted Assets $500 million
Capital Adequacy Ratio 20%
Key Takeaways
- The Capital Adequacy Ratio (CAR) is a measure of a bank’s financial strength and stability.
- It is calculated by dividing a bank’s total capital by its total risk-weighted assets.
- The ratio is expressed as a percentage and is used to assess a bank’s ability to absorb losses and remain solvent.
- Banks must maintain a minimum CAR in order to remain compliant with regulatory requirements.
- A high CAR indicates that a bank is well-capitalized and has a strong financial position.
Conclusion
The Capital Adequacy Ratio (CAR) is an important measure of a bank’s financial health and stability. It is used by regulators to ensure that banks have sufficient capital to cover their risks and remain solvent. Banks must maintain a minimum CAR in order to remain compliant with regulatory requirements. A high CAR indicates that a bank is well-capitalized and has a strong financial position.
