\nCapital Adequacy Ratio or CAR is the ratio of a bank\u2019s capital to its risk. It is also known as the Capital to Risk (Weighted) Assets Ratio (CRAR). In other words, it is the ratio of a bank\u2019s capital to its risk-weighted assets and current liabilities. CAR is important from the depositors\u2019 security perspective and also for maintaining the stability of the financial ecosystem.<\/p>\n
Capital adequacy ratio (CAR) is defined as the ratio of a bank\u2019s capital in relation to its assets and liabilities. Banks need to maintain a certain percentage of their debt exposure as their assets, as per regulations. Capital adequacy ratio measures how much capital a bank has, as a percentage of its total debt exposure.
\nThe CAR is decided by central banks or banking regulators to keep commercial banks in check and to prevent them from taking excess leverage.<\/p>\n
The CAR or the CRAR is computed by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, operational risk, and market risk.<\/p>\n
Capital Adequacy Ratio = (Tier I + Tier II + Tier III (Capital funds)) \/Risk weighted Assets
\nHere,
\nTier-I capital – these constitute the banks\u2019 assets which can help them to tackle any shock without winding up their operations. It is a bank\u2019s core capital including the shareholders\u2019 equity and retained earnings.
\nTier-II capital – these constitute the banks\u2019 assets which can help them tackle losses in the event of closure. A bank\u2019s Tier-II capital is made of revaluation reserves, hybrid capital instruments and subordinated term debt.
\nTier-III capital: This is a mix of Tier-II capital and the short-term subordinated loans.<\/p>\n
Capital Adequacy Ratio or CAR is the ratio of a bank\u2019s capital to its risk. It is also known as the Capital to Risk (Weighted) Assets Ratio (CRAR). In other words, it is the ratio of a bank\u2019s capital to its risk-weighted assets and current liabilities. CAR is important from the depositors\u2019 security perspective and […]<\/p>\n","protected":false},"author":67,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[11],"tags":[],"class_list":["post-4061","post","type-post","status-publish","format-standard","hentry","category-stocks"],"_links":{"self":[{"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/posts\/4061","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/users\/67"}],"replies":[{"embeddable":true,"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/comments?post=4061"}],"version-history":[{"count":0,"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/posts\/4061\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/media?parent=4061"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/categories?post=4061"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.fisdom.com\/glossary\/wp-json\/wp\/v2\/tags?post=4061"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}