1. What is Capital Adequacy Ratio?

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.

2. How Does the Calculator Work?

The calculator uses the CAR formula:

Where:

• \( Tier1 \) — Core capital including equity capital and disclosed reserves
• \( Tier2 \) — Supplementary capital including undisclosed reserves and subordinated debt
• \( Risk\ Weighted\ Assets \) — Total assets adjusted for their risk levels

Explanation: The ratio measures a bank's financial strength by comparing its capital to its risk-weighted assets.

3. Importance of CAR Calculation

Details: CAR is crucial for assessing a bank's ability to absorb losses and meet financial obligations. Regulators use it to ensure banks have enough capital to withstand financial stress.

4. Using the Calculator

Tips: Enter Tier1 capital, Tier2 capital, and risk-weighted assets in currency units. All values must be valid (positive numbers, with risk-weighted assets > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is the minimum CAR requirement?
A: Most regulators require a minimum CAR of 8%, with Tier1 capital being at least 6% of risk-weighted assets.

Q2: What's the difference between Tier1 and Tier2 capital?
A: Tier1 capital is core capital that can absorb losses without ceasing operations, while Tier2 capital is supplementary and absorbs losses in liquidation.

Q3: How are risk-weighted assets calculated?
A: Different asset classes have different risk weights assigned by regulators based on their perceived riskiness.

Q4: Why is CAR important for banks?
A: It ensures banks have sufficient capital to cover potential losses, protecting depositors and maintaining financial system stability.

Q5: How often should CAR be calculated?
A: Banks typically calculate CAR quarterly and report to regulators, with continuous monitoring for internal risk management.