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Capital Adequacy Ratio Formula:
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The Capital Adequacy Ratio (CAR) is a measure of a bank's capital expressed as a percentage of its risk-weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems around the world.
The calculator uses the CAR formula:
Where:
Explanation: The ratio measures the amount of a bank's capital in relation to the amount of its credit exposures, with different risk weights applied to different asset classes.
Details: CAR is a crucial indicator of a bank's financial strength and stability. Regulators use it to ensure banks can absorb a reasonable amount of loss and complies with statutory capital requirements.
Tips: Enter capital and risk-weighted assets in the same currency units. Both values must be valid (capital ≥ 0, RWA > 0).
Q1: What is the minimum CAR requirement?
A: Under Basel III, the minimum CAR requirement is 8% of risk-weighted assets, though many regulators require higher ratios.
Q2: What constitutes bank capital?
A: Bank capital is primarily divided into Tier 1 capital (core capital including equity and disclosed reserves) and Tier 2 capital (supplementary capital including undisclosed reserves and subordinated debt).
Q3: How are risk weights determined?
A: Risk weights are assigned based on the credit risk of assets, with safer assets (like government bonds) having lower weights and riskier assets (like corporate loans) having higher weights.
Q4: Why is CAR important for financial stability?
A: A strong CAR indicates that a bank can withstand financial distress and economic downturns, reducing the risk of bank failures and protecting the broader financial system.
Q5: How often should CAR be calculated?
A: Banks typically calculate CAR quarterly, and regulators require regular reporting to ensure ongoing compliance with capital requirements.