57:
It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk-weighted credit exposures. The enforcement of regulated levels of this ratio is intended to protect depositors and promote stability and efficiency of financial systems around the world.
151:
445: : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by the national regulator to each such assets.
398:
instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). Unlike traditional leverage, however, CAR recognizes that assets can have different levels of
762:
would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.
277:
423:
by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the
155:
TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & brought-forward losses)
97:
451: : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the
681:
367:
risk, operational risk etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders.
640:
722:
599:
558:
452:
353:
318:
188:
68:
tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
158:
TIER 2 CAPITAL = A) Undisclosed
Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts
363:
Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as
774:
recognize that different types of equity are more important than others. To recognize this, different adjustments are made:
207:
355:
above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
282:
The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the
939:
434:
is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.
861:
833:
988:
978:
146:{\displaystyle {\mbox{CAR}}={\cfrac {\mbox{Tier 1 capital + Tier 2 capital}}{\mbox{Risk weighted assets}}}}
50:
track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory
477:
have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.
983:
930:
879:
873:
651:
610:
958:
904:
692:
383:
569:
528:
65:
tier one capital, which can absorb losses without a bank being required to cease trading; and
855:
331:
296:
8:
828:
172:
86:
51:
379:
935:
782:
195:
39:
867:
793:
511:
467:
391:
364:
459:
368:
191:
47:
845:
840:
812:
805:
790:
325:
290:
78:
972:
474:
416:
375:
to protect depositors, thereby maintaining confidence in the banking system.
283:
962:
908:
850:
816:
771:
424:
471:
455:. This will then have to be again multiplied by the relevant weightage.
428:
286:) and is set by the national banking regulator of different countries.
82:
77:
Capital adequacy ratios (CARs) are a measure of the amount of a bank's
778:
Tier I Capital: Actual contributed equity plus retained earnings...
510:
has debt of 95 units, all of which are deposits. By definition,
801:
412:
395:
789:
Different minimum CARs are applied. For example, the minimum
497:
199:
166:
31:
797:
463:
431:
420:
400:
387:
321:
162:
43:
35:
382:; in the most basic formulation, it is comparable to the
26:) also known as Capital to Risk (Weighted) Assets Ratio (
517:
Bank A's risk-weighted assets are calculated as follows
256:
224:
128:
114:
272:{\displaystyle {\mbox{CAR}}={\cfrac {T_{1}+T_{2}}{a}}}
259:
227:
212:
133:
131:
119:
117:
102:
695:
654:
613:
572:
531:
394:
leverage formulations (although CAR uses equity over
334:
299:
210:
175:
100:
815:that may be "counted" towards CAR, which varies by
716:
675:
634:
593:
552:
347:
312:
271:
182:
145:
419:, CAR primarily adjusts for assets that are less
970:
834:Capital requirement § Common capital ratios
804:may be 6%, while the minimum CAR when including
899:
897:
895:
781:Tier II Capital: Preferred shares plus 50% of
483:has assets totaling 100 units, consisting of:
892:
514:is equal to assets minus debt, or 5 units.
320:above), which can absorb losses without a
437:
176:
927:
971:
92:Capital adequacy ratio is defined as:
371:in most countries define and monitor
324:being required to cease trading, and
198:requirement. If using risk weighted
16:Ratio of a bank's capital to its risk
449:Non-funded (Off-Balance sheet) Items
765:
289:Two types of capital are measured:
61:Two types of capital are measured:
13:
705:
664:
623:
582:
541:
14:
1000:
952:
443:Risk weighted assets - Fund Based
427:. In the most basic application,
406:
121:Tier 1 capital + Tier 2 capital
921:
905:"Capital Adequacy Ratio - CAR"
862:Total Loss Absorbency Capacity
811:There is usually a maximum of
470:have a 0% risk weighting, and
1:
885:
7:
822:
676:{\displaystyle 50*100\%=50}
10:
1005:
635:{\displaystyle 20*50\%=10}
490:Government bonds: 15 units
72:
931:The Principles of Banking
928:Choudhry, Moorad (2012).
727:
717:{\displaystyle 5*100\%=5}
411:Since different types of
880:Liquidity Coverage Ratio
874:Net Stable Funding Ratio
796:allowed by statute for
594:{\displaystyle 15*0\%=0}
553:{\displaystyle 10*0\%=0}
493:Mortgage loans: 20 units
453:Credit Conversion Factor
165:can either be weighted
959:Capital Adequacy Ratio
718:
677:
636:
595:
564:Government securities
554:
438:Risk weighting example
358:
349:
314:
273:
184:
147:
20:Capital Adequacy Ratio
934:. Wiley. p. 97.
719:
678:
637:
596:
555:
503:Other assets: 5 units
350:
348:{\displaystyle T_{2}}
315:
313:{\displaystyle T_{1}}
274:
185:
148:
856:Tier 1 Capital Ratio
693:
652:
611:
570:
529:
332:
297:
208:
192:national regulator's
190:) or the respective
173:
135:Risk weighted assets
98:
52:Capital requirements
989:Capital requirement
979:Financial economics
829:Capital requirement
258:
226:
183:{\displaystyle \,a}
130:
116:
87:risk-weighted asset
48:National regulators
714:
673:
632:
591:
550:
378:CAR is similar to
369:Banking regulators
345:
310:
269:
265:
253:
216:
180:
143:
139:
137:
125:
123:
106:
783:subordinated debt
756:
755:
749:CAR (Equity/RWA)
267:
257:
225:
215:
141:
136:
129:
122:
115:
105:
996:
984:Financial ratios
946:
945:
925:
919:
918:
916:
915:
901:
766:Types of capital
733:Weighted assets
723:
721:
720:
715:
682:
680:
679:
674:
641:
639:
638:
633:
600:
598:
597:
592:
559:
557:
556:
551:
520:
519:
468:government bonds
354:
352:
351:
346:
344:
343:
326:tier two capital
319:
317:
316:
311:
309:
308:
291:tier one capital
278:
276:
275:
270:
268:
266:
264:
254:
252:
251:
250:
238:
237:
222:
217:
213:
189:
187:
186:
181:
152:
150:
149:
144:
142:
140:
138:
134:
126:
124:
120:
112:
107:
103:
1004:
1003:
999:
998:
997:
995:
994:
993:
969:
968:
955:
950:
949:
942:
926:
922:
913:
911:
903:
902:
893:
888:
825:
813:Tier II capital
806:Tier II capital
768:
694:
691:
690:
653:
650:
649:
612:
609:
608:
605:Mortgage loans
571:
568:
567:
530:
527:
526:
462:establish that
440:
415:have different
409:
361:
339:
335:
333:
330:
329:
304:
300:
298:
295:
294:
260:
255:
246:
242:
233:
229:
228:
223:
221:
211:
209:
206:
205:
174:
171:
170:
132:
127:
118:
113:
111:
101:
99:
96:
95:
81:expressed as a
75:
17:
12:
11:
5:
1002:
992:
991:
986:
981:
967:
966:
954:
953:External links
951:
948:
947:
941:978-1119755647
940:
920:
890:
889:
887:
884:
883:
882:
876:
870:
868:Leverage Ratio
864:
858:
853:
848:
846:Tier 2 capital
843:
841:Tier 1 capital
838:
837:
836:
824:
821:
787:
786:
779:
767:
764:
754:
753:
750:
746:
745:
742:
738:
737:
734:
730:
729:
725:
724:
713:
710:
707:
704:
701:
698:
688:
684:
683:
672:
669:
666:
663:
660:
657:
647:
643:
642:
631:
628:
625:
622:
619:
616:
606:
602:
601:
590:
587:
584:
581:
578:
575:
565:
561:
560:
549:
546:
543:
540:
537:
534:
524:
505:
504:
501:
494:
491:
488:
487:Cash: 10 units
475:mortgage loans
439:
436:
408:
407:Risk weighting
405:
360:
357:
342:
338:
307:
303:
263:
249:
245:
241:
236:
232:
220:
194:minimum total
179:
110:
74:
71:
70:
69:
66:
15:
9:
6:
4:
3:
2:
1001:
990:
987:
985:
982:
980:
977:
976:
974:
964:
960:
957:
956:
943:
937:
933:
932:
924:
910:
906:
900:
898:
896:
891:
881:
877:
875:
871:
869:
865:
863:
859:
857:
854:
852:
851:Basel accords
849:
847:
844:
842:
839:
835:
832:
831:
830:
827:
826:
820:
818:
814:
809:
807:
803:
799:
795:
792:
784:
780:
777:
776:
775:
773:
763:
761:
751:
748:
747:
743:
740:
739:
735:
732:
731:
726:
711:
708:
702:
699:
696:
689:
687:Other assets
686:
685:
670:
667:
661:
658:
655:
648:
645:
644:
629:
626:
620:
617:
614:
607:
604:
603:
588:
585:
579:
576:
573:
566:
563:
562:
547:
544:
538:
535:
532:
525:
522:
521:
518:
515:
513:
509:
502:
499:
495:
492:
489:
486:
485:
484:
482:
478:
476:
473:
469:
465:
461:
456:
454:
450:
446:
444:
435:
433:
430:
426:
425:Basel Accords
422:
418:
417:risk profiles
414:
404:
402:
397:
393:
389:
385:
381:
376:
374:
370:
366:
356:
340:
336:
327:
323:
305:
301:
292:
287:
285:
284:Basel Accords
280:
261:
247:
243:
239:
234:
230:
218:
203:
201:
197:
193:
177:
168:
164:
159:
156:
153:
108:
93:
90:
88:
84:
80:
67:
64:
63:
62:
59:
55:
53:
49:
45:
41:
37:
33:
29:
25:
21:
963:Investopedia
929:
923:
912:. Retrieved
909:Investopedia
817:jurisdiction
810:
788:
769:
759:
758:Even though
757:
646:Other loans
516:
507:
506:
480:
479:
457:
448:
447:
442:
441:
410:
377:
372:
362:
288:
281:
204:
160:
157:
154:
94:
91:
79:core capital
76:
60:
56:
27:
23:
19:
18:
808:may be 8%.
772:Basel rules
728:Total risk
472:residential
460:regulations
973:Categories
914:2007-07-10
886:References
800:-weighted
500:: 50 units
429:government
83:percentage
30:), is the
706:%
700:∗
665:%
659:∗
624:%
618:∗
583:%
577:∗
542:%
536:∗
823:See also
508:Bank "A"
481:Bank "A"
380:leverage
741:Equity
384:inverse
279:≥ 10%.
196:capital
85:of its
73:Formula
42:to its
40:capital
938:
872:NSFR,
860:TLAC,
802:assets
794:equity
791:Tier I
760:Bank A
752:7.69%
512:equity
496:Other
458:Local
413:assets
396:assets
392:equity
365:credit
200:assets
167:assets
161:where
878:LCR,
523:Cash
498:loans
421:risky
34:of a
32:ratio
936:ISBN
866:LR,
798:risk
770:The
466:and
464:cash
432:debt
401:risk
390:-to-
388:debt
322:bank
163:Risk
44:risk
36:bank
28:CRAR
961:at
785:...
736:65
703:100
662:100
386:of
373:CAR
359:Use
214:CAR
104:CAR
38:'s
24:CAR
975::
907:.
894:^
819:.
744:5
671:50
656:50
630:10
621:50
615:20
574:15
533:10
403:.
202:,
89:.
54:.
46:.
965:.
944:.
917:.
712:5
709:=
697:5
668:=
627:=
589:0
586:=
580:0
548:0
545:=
539:0
341:2
337:T
328:(
306:1
302:T
293:(
262:a
248:2
244:T
240:+
235:1
231:T
219:=
178:a
169:(
109:=
22:(
Text is available under the Creative Commons Attribution-ShareAlike License. Additional terms may apply.