**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.

## Formula

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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