The capital adequacy ratio (CAR), also known as capital to risk-weighted assets ratio, measures a bank's financial strength by using its capital and assets. It is used to protect depositors and promote the stability a൲nd efficiency of financial systems around tᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚhe world.

Components of the Capital Adequacy Ratio

The 澳洲幸运5开奖号码历史查询:capital adequacy ratio is calculated by dividing a bank's capital by its risk-weighted assets. The capital used to calculate the capital adequacy ratio is divided into two tiers: Tier 1 and Tier 2.

Tier-1 Capital

澳洲幸运5开奖号码历史查询:Tier-1 capital, or core capital, is comprised of equity capital, ordinary share capital, intangible assets, and audited revenue reserves, or what the bank has stored to help it through typical risky transactions, such as trading, investing, and lending. Tier-1 capital is used to absorb losses and does not require a bank to cease operations.

Tier-2 Capital

澳洲幸运5开奖号码历史查询:Tier-2 capital comprises unaudited retained earnings, unaudited reserves, and general loss reserves. This capital absorbs losses in the event of a company winding up or liquidating. Tier-2 capital is seen as less secure than Tier-1.

The two capital tiers are added together and divided by risk-weighted assets to calculate a bank's capital adequacy ratio. Risk-weighted assets are calculated by looking at a bank's loans, evaluating the risk, and then assigning a weight.

The Minimum Ratio of Capital to Risk-Weighted A🅷ssets

Basel II and Basel III, which are international banking regulations, set the minimum ratio of capital to risk-weighted assets at 8%; however, additional requirements can bump it up to 10.5%.

澳洲幸运5开奖号码历史查询:Minimum capital adequacy ratios are critical in ensuring that banks have enough cushion to absorb a reasonable amount of losses before the🅘y become insolvent and consequently lose depositors♔’ funds.

Example of a High Capital Adequacy Ratio

For example, suppose bank ABC has $10 million in Tier-1 capital and $5 million in Tier-2 capital. It has loans that have been weighteꦫd and calculated a𒊎s $50 million.

The capital adequacy ratio of bank ABC is 30% (($10 million + $5 million) / $50 million). Therefore, this bank has a high capital adequacy ratio and is considered to be safer. As a result, Bank ABC is less likely to become insolvent if unexpected losses occur.

The Bottom Line

A bank's capital adequacy ratio is an indicator of its financial health and stability. It helps to ensure it has enough capital to cover losses and, as such, assess its ability to remain solvent.

Regulatory standards, such as Basel II and III, set minimum capital adequacy thresholds to protect bank depositors and maintain financial stability in the wider economy. A higher ratio the better, as it shows a bank is better placed to withstand economic downturns or unexpected losses.