Risk Weighting
Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky 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 Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.
Read more about this topic: Capital Adequacy Ratio
Famous quotes containing the word risk:
“The reality is that zero defects in products plus zero pollution plus zero risk on the job is equivalent to maximum growth of government plus zero economic growth plus runaway inflation.”
—Dixie Lee Ray (b. 1924)