Capital Adequacy Ratio - Definition, What is Capital Adequacy Ratio, Advantages of Capital Adequacy Ratio, and Latest News - ClearTax (2024)

FAQs

Capital Adequacy Ratio - Definition, What is Capital Adequacy Ratio, Advantages of Capital Adequacy Ratio, and Latest News - ClearTax? ›

The capital adequacy ratio (CAR) is a measure of how much capital a bank has available, reported as a percentage of a bank's risk-weighted credit exposures. The purpose is to establish that banks have enough capital on reserve to handle a certain amount of losses, before being at risk for becoming insolvent.

CAR, or the capital adequacy ratio, is a comparison of the available capital that a bank has on hand to its risk-weighted assets. The ratio provides a quick idea of whether a bank has enough funds to cover losses and remain solvent under difficult financial circ*mstances.

Definition: Capital Adequacy Ratio (CAR) is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

High capital adequacy ratio is good because it indicates that the bank is in a better position to deal with unexpected losses due to availability of adequate capital.

What are the Requirements? Under Basel III, all banks are required to have a Capital Adequacy Ratio of at least 8%. Since Tier 1 Capital is more important, banks are also required to have a minimum amount of this type of capital. Under Basel III, Tier 1 Capital divided by Risk-Weighted Assets needs to be at least 6%.

Bandhan Bank has the highest capital adequacy ratio (CAR) in India.

Banks can improve their CAR by increasing the levels of regulatory capital that is the numerator of the capital ratio. They also maintain their CAR by decreasing the risk related to the weighted assets. This has been indicated as the denominator of the capital ratio.

United States Capital Adequacy Ratio was measured at 15.2 % in Mar 2024, compared with the previous update of 15.1 % in Dec 2023 See the table below for more data.

Principle: Capital should be of high quality and loss absorbing. Quality of capital is determined through the application of the Basel III criteria for common equity, and additional tier 1 and tier 2 capital, with emphasis on retained earnings as the highest quality of capital.

Adequate capital is critical to protect financial institutions' depositors and policyholders. Regulators set requirements on minimum capital to ensure financial institutions can absorb unexpected losses in their business. This is a core tool of prudential regulation and also supports system-level financial stability.

What is a good capital ratio? ›

Determining a Good Working Capital Ratio

Generally, a working capital ratio of less than one is taken as indicative of potential future liquidity problems, while a ratio of 1.5 to two is interpreted as indicating a company is on the solid financial ground in terms of liquidity.

Generally, a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations.

The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total risk-weighted assets (RWA). Risk-weighted assets are the total of all assets held by the bank weighted by credit risk according to a formula determined by the Regulator (usually the country's central bank).

Capital adequacy – the adequate amount (usually defined by regulators) of capital (shareholder money) a bank needs to hold, as a percentage of its risk-weighted assets.

In general terms, a bank with a high CRAR/CAR is deemed safe/healthy and likely to fulfill its financial obligations.

Also known as Best's Capital Adequacy Ratio, BCAR, examines an insurer's leverage, underwriting activities, and financial performance and uses this information to test various scenarios to see how each would impact the insurer's balance sheet.

Adequate capitalization allows finance companies to maintain lending activities, supporting economic growth by providing credit to businesses and consumers. The regulator requires that finance companies maintain a CAR of not less than 12.5%.