Capital Adequacy Ratio [CAR]

The Capital Adequacy Ratio (CAR) measures a bank’s capital as a percentage of its risk-weighted assets, ensuring banks can absorb losses and protect depositors. Under Basel III regulations, banks must maintain minimum CAR of 8%, comprising 4.5% Common Equity Tier 1 (CET1), 1.5% additional Tier 1, and 2% Tier 2 capital. Systemically important banks face additional buffers up to 3.5%. For example, a bank with $10 billion in risk-weighted assets needs at least $800 million in qualifying capital. Risk weights vary: government bonds (0%), mortgages (35-50%), corporate loans (100%), past-due loans (150%). During stress tests, regulators assess whether banks maintain adequate capital under adverse scenarios. The 2008 crisis revealed many banks were undercapitalized, prompting stricter requirements. Higher CAR means greater safety but potentially lower returns on equity. Banks manage CAR through retained earnings, equity issuance, asset sales, or reducing risk-weighted assets. Regular monitoring ensures banking system stability while balancing credit availability.