CAPITAL ADEQUACY RATIO - CAR

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Capital Adequacy Ratio (CAR) is a measure of a bank’s capital. It is expressed as a percentage of bank’s risk weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems around the world. It is calculated as:
CAR = Tier one capital + Tier two capital divided by Risk Weighted Assets.
This is also known as Capital to Risk Weighted Assets Ratio (CRAR)

Tier one capital absorbs losses without a bank being required to cease trading while tier two capital absorbs losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

Capital Adequacy Ratios ensure the efficiency and stability of a nation’s financial system by lowering the risk of banks becoming insolvent for if a bank is declared insolvent, it shakes the confidence in the financial system thereby making the entire financial system unsettled.

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