Capital adequacy ratio

Capital Adequacy Ratio

Capital adequacy ratio

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Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.


Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed as a percentage of its assets weighted credit exposures.

Capital adequacy ratio is defined as

<math>mbox = cfrac</math>

TIER 1 CAPITAL -A)Equity Capital, B) Disclosed Reserves

TIER 2 CAPITAL -A)Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term Debts

where Risk can either be weighted assets (<math>,a</math>) or the respective national regulator's minimum total capital requirement. If using risk weighted assets,

<math>mbox = cfrac</math> ≥ 10%.

The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries.

Two types of capital are measured: tier one capital (<math>T_1</math> above), which can absorb losses without a bank being required to cease trading, and tier two capital (<math>T_2</math> above), which can absorb losses in the event of a winding-up and so provides a lesser degree of...
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