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
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