What do you understand by Capital Adequacy Ratio ? Explain the various constituents of Tier I and Tier II capitals.
Capital Adequacy Ratio (CAR) in Bank Financial Management: Understanding Tier I and Tier II Capitals
Capital Adequacy Ratio (CAR) is a crucial metric in the realm of banking that assesses a bank's financial health and its ability to absorb losses. It serves as a regulatory tool to ensure that banks maintain an adequate level of capital in proportion to their risk-weighted assets. In essence, CAR acts as a safety cushion, safeguarding depositors and the overall stability of the banking system.
Definition of Capital Adequacy Ratio:
CAR is expressed as a percentage and is calculated by dividing a bank's capital by its risk-weighted assets. The formula is as follows:
\[CAR = \frac{\text{Total Capital}}{\text{Risk-Weighted Assets}} \times 100\%\]
The Basel Committee on
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