68:
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.
162:
456: : 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.
409:
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
773:
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.
288:
434:
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
166:
TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & brought-forward losses)
108:
462: : 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
692:
378:
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.
651:
733:
610:
569:
364:
329:
199:
950:
79:
tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
169:
TIER 2 CAPITAL = A) Undisclosed
Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts
374:
Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as
872:
785:
recognize that different types of equity are more important than others. To recognize this, different adjustments are made:
218:
366:
above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
999:
989:
293:
The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the
445:
is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.
994:
941:
890:
884:
463:
157:{\displaystyle {\mbox{CAR}}={\cfrac {\mbox{Tier 1 capital + Tier 2 capital}}{\mbox{Risk weighted assets}}}}
394:
61:
track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory
488:
have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.
866:
844:
839:
97:
62:
662:
390:
621:
969:
915:
703:
946:
793:
580:
539:
206:
50:
76:
tier one capital, which can absorb losses without a bank being required to cease trading; and
804:
522:
478:
402:
375:
342:
307:
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202:
58:
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89:
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485:
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294:
973:
919:
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827:
782:
435:
482:
439:
93:
386:
to protect depositors, thereby maintaining confidence in the banking system.
17:
878:
466:. This will then have to be again multiplied by the relevant weightage.
297:) and is set by the national banking regulator of different countries.
88:
Capital adequacy ratios (CARs) are a measure of the amount of a bank's
812:
423:
406:
789:
Tier I Capital: Actual contributed equity plus retained earnings...
508:
210:
177:
42:
808:
521:
has debt of 95 units, all of which are deposits. By definition,
474:
442:
431:
411:
398:
332:
173:
54:
46:
800:
Different minimum CARs are applied. For example, the minimum
393:; in the most basic formulation, it is comparable to the
37:) also known as Capital to Risk (Weighted) Assets Ratio (
528:
Bank A's risk-weighted assets are calculated as follows
267:
235:
139:
125:
283:{\displaystyle {\mbox{CAR}}={\cfrac {T_{1}+T_{2}}{a}}}
270:
238:
223:
144:
142:
130:
128:
113:
706:
665:
624:
583:
542:
405:
leverage formulations (although CAR uses equity over
345:
310:
221:
186:
111:
826:that may be "counted" towards CAR, which varies by
727:
686:
645:
604:
563:
358:
323:
282:
193:
156:
430:, CAR primarily adjusts for assets that are less
845:Capital requirement § Common capital ratios
815:may be 6%, while the minimum CAR when including
910:
908:
906:
792:Tier II Capital: Preferred shares plus 50% of
494:has assets totaling 100 units, consisting of:
8:
525:is equal to assets minus debt, or 5 units.
331:above), which can absorb losses without a
705:
664:
623:
582:
541:
350:
344:
315:
309:
271:
257:
244:
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220:
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185:
143:
129:
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530:
902:
103:Capital adequacy ratio is defined as:
382:in most countries define and monitor
335:being required to cease trading, and
209:requirement. If using risk weighted
27:Ratio of a bank's capital to its risk
7:
460:Non-funded (Off-Balance sheet) Items
300:Two types of capital are measured:
72:Two types of capital are measured:
716:
675:
634:
593:
552:
25:
454:Risk weighted assets - Fund Based
438:. In the most basic application,
132:Tier 1 capital + Tier 2 capital
916:"Capital Adequacy Ratio - CAR"
873:Total Loss Absorbency Capacity
822:There is usually a maximum of
481:have a 0% risk weighting, and
1:
687:{\displaystyle 50*100\%=50}
1016:
646:{\displaystyle 20*50\%=10}
501:Government bonds: 15 units
942:The Principles of Banking
939:Choudhry, Moorad (2012).
738:
728:{\displaystyle 5*100\%=5}
422:Since different types of
891:Liquidity Coverage Ratio
885:Net Stable Funding Ratio
807:allowed by statute for
605:{\displaystyle 15*0\%=0}
564:{\displaystyle 10*0\%=0}
504:Mortgage loans: 20 units
464:Credit Conversion Factor
176:can either be weighted
970:Capital Adequacy Ratio
729:
688:
647:
606:
575:Government securities
565:
449:Risk weighting example
360:
325:
284:
195:
158:
31:Capital Adequacy Ratio
945:. Wiley. p. 97.
730:
689:
648:
607:
566:
514:Other assets: 5 units
361:
359:{\displaystyle T_{2}}
326:
324:{\displaystyle T_{1}}
285:
196:
159:
867:Tier 1 Capital Ratio
704:
663:
622:
581:
540:
343:
308:
219:
203:national regulator's
201:) or the respective
184:
146:Risk weighted assets
109:
63:Capital requirements
1000:Capital requirement
990:Financial economics
840:Capital requirement
269:
237:
194:{\displaystyle \,a}
141:
127:
98:risk-weighted asset
59:National regulators
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389:CAR is similar to
380:Banking regulators
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321:
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794:subordinated debt
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760:CAR (Equity/RWA)
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133:
126:
116:
16:(Redirected from
1007:
995:Financial ratios
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777:Types of capital
744:Weighted assets
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479:government bonds
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337:tier two capital
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302:tier one capital
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904:
899:
836:
824:Tier II capital
817:Tier II capital
779:
702:
701:
661:
660:
620:
619:
616:Mortgage loans
579:
578:
538:
537:
473:establish that
451:
426:have different
420:
372:
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341:
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306:
305:
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217:
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182:
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138:
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92:expressed as a
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28:
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22:
15:
12:
11:
5:
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1002:
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992:
982:
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978:
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965:
964:External links
962:
959:
958:
952:978-1119755647
951:
931:
901:
900:
898:
895:
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879:Leverage Ratio
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869:
864:
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857:Tier 2 capital
854:
852:Tier 1 capital
849:
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498:Cash: 10 units
486:mortgage loans
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418:Risk weighting
416:
371:
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353:
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274:
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205:minimum total
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24:
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10:
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3:
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862:Basel accords
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750:
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698:Other assets
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681:
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672:
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659:
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640:
637:
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436:Basel Accords
433:
429:
428:risk profiles
425:
417:
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400:
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351:
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295:Basel Accords
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208:
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179:
175:
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119:
104:
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60:
56:
52:
48:
44:
40:
36:
32:
19:
18:Capital ratio
974:Investopedia
940:
934:
923:. Retrieved
920:Investopedia
828:jurisdiction
821:
799:
780:
770:
769:Even though
768:
657:Other loans
527:
518:
517:
491:
490:
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458:
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452:
421:
388:
383:
373:
299:
292:
215:
171:
168:
165:
105:
102:
90:core capital
87:
71:
67:
38:
34:
30:
29:
819:may be 8%.
783:Basel rules
739:Total risk
483:residential
471:regulations
984:Categories
925:2007-07-10
897:References
811:-weighted
511:: 50 units
440:government
94:percentage
41:), is the
717:%
711:∗
676:%
670:∗
635:%
629:∗
594:%
588:∗
553:%
547:∗
834:See also
519:Bank "A"
492:Bank "A"
391:leverage
752:Equity
395:inverse
290:≥ 10%.
207:capital
96:of its
84:Formula
53:to its
51:capital
949:
883:NSFR,
871:TLAC,
813:assets
805:equity
802:Tier I
771:Bank A
763:7.69%
523:equity
507:Other
469:Local
424:assets
407:assets
403:equity
376:credit
211:assets
178:assets
172:where
889:LCR,
534:Cash
509:loans
432:risky
45:of a
43:ratio
947:ISBN
877:LR,
809:risk
781:The
477:and
475:cash
443:debt
412:risk
401:-to-
399:debt
333:bank
174:Risk
55:risk
47:bank
39:CRAR
972:at
796:...
747:65
714:100
673:100
397:of
384:CAR
370:Use
225:CAR
115:CAR
49:'s
35:CAR
986::
918:.
905:^
830:.
755:5
682:50
667:50
641:10
632:50
626:20
585:15
544:10
414:.
213:,
100:.
65:.
57:.
976:.
955:.
928:.
723:5
720:=
708:5
679:=
638:=
600:0
597:=
591:0
559:0
556:=
550:0
352:2
348:T
339:(
317:1
313:T
304:(
273:a
259:2
255:T
251:+
246:1
242:T
230:=
189:a
180:(
120:=
33:(
20:)
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