Formula
Capital adequacy ratios (CARs) are a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset.
Capital adequacy ratio is defined as:
TIER 1 CAPITAL - (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & b/f losses)
TIER 2 CAPITAL -A)Undisclosed Reserves, B)General Loss reserves, C) hybrid debt capital instruments and subordinated debts
where Risk can either be weighted assets or the respective national regulator's minimum total capital requirement. If using risk weighted assets,
≥ 10%.
The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries.
Two types of capital are measured: tier one capital ( above), which can absorb losses without a bank being required to cease trading, and tier two capital ( above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Read more about this topic: Capital Adequacy Ratio
Famous quotes containing the word formula:
“Every formula which expresses a law of nature is a hymn of praise to God.”
—Maria Mitchell (1818–1889)
“Hidden away amongst Aschenbach’s writing was a passage directly asserting that nearly all the great things that exist owe their existence to a defiant despite: it is despite grief and anguish, despite poverty, loneliness, bodily weakness, vice and passion and a thousand inhibitions, that they have come into being at all. But this was more than an observation, it was an experience, it was positively the formula of his life and his fame, the key to his work.”
—Thomas Mann (18751955)
“But suppose, asks the student of the professor, we follow all your structural rules for writing, what about that “something else” that brings the book alive? What is the formula for that? The formula for that is not included in the curriculum.”
—Fannie Hurst (1889–1968)