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Capital Adequacy Ratio (CAR) Formula:
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The Capital Adequacy Ratio (CAR) is a measure of a bank's capital, expressed as a percentage of its risk-weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems around the world.
The calculator uses the CAR formula:
Where:
Explanation: The ratio measures the amount of a bank's capital in relation to the amount of its risk-weighted assets. A higher CAR indicates a bank is better able to withstand financial distress.
Details: Regulators use CAR to ensure banks can absorb a reasonable amount of loss and complies with statutory Capital requirements. It's a crucial measure of financial stability for banking institutions.
Tips: Enter the bank's capital and risk-weighted assets in the same currency. Both values must be positive numbers greater than zero.
Q1: What is a good Capital Adequacy Ratio?
A: Most regulators require a minimum CAR of 8-10%. A ratio above this minimum is generally considered strong, with many healthy banks maintaining CARs of 12-15%.
Q2: What's the difference between CAR and other capital ratios?
A: CAR is specifically designed to measure capital against risk-weighted assets, while other ratios might measure capital against total assets without risk weighting.
Q3: How often should CAR be calculated?
A: Banks typically calculate CAR quarterly as part of their regulatory reporting requirements, though internal monitoring may occur more frequently.
Q4: What are the components of bank capital?
A: Bank capital typically includes Tier 1 capital (common equity and disclosed reserves) and Tier 2 capital (undisclosed reserves, hybrid instruments, and subordinated term debt).
Q5: How do risk weights affect CAR?
A: Different asset classes carry different risk weights. For example, government bonds might have 0% risk weight while corporate loans might have 100% risk weight, significantly impacting the CAR calculation.