Capital Adequacy Ratio (CAR)
Bank capital measured against risk-weighted assets for stability.
Detailed Description
Capital Adequacy Ratio (CAR)
What does a higher Capital Adequacy Ratio (CAR) indicate?
A higher CAR indicates that a bank has a greater buffer to withstand financial distress, protecting depositors and maintaining confidence in the banking system.
How is the Capital Adequacy Ratio (CAR) calculated?
CAR is calculated by dividing a bank's total capital by its risk-weighted assets and multiplying by 100.
What are the two main components of CAR?
The two main components of CAR are Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).
What regulatory framework governs the Capital Adequacy Ratio?
The regulatory framework for CAR is primarily established by the Basel Accords, particularly the Basel III framework.
How does CAR affect lending practices?
A higher CAR generally allows a bank to extend more credit, while a lower CAR may force a bank to reduce lending activities.