Capital adequacy
Capital Adequacy is a term used in the field of financial regulation to describe the minimum amount of capital that a bank or other financial institution must hold as required by its financial regulator. This is usually defined as a bank's capital divided by its risk-weighted assets.
Overview[edit | edit source]
Capital adequacy ratios (CARs) are a measure of the amount of a bank's capital expressed as a percentage of its risk-weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.
Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Calculation[edit | edit source]
The risk-weighted assets take into account credit risk, market risk and operational risk. The Basel III accord stipulates that banks must have a tier 1 capital ratio of 6% and a total capital ratio of 8%.
Importance[edit | edit source]
Capital adequacy ratios are a critical measure of the health of a bank. They are used to protect depositors from the risk that a bank might become insolvent. The higher the CAR, the better equipped the bank is to handle losses without becoming insolvent.
See also[edit | edit source]
Navigation: Wellness - Encyclopedia - Health topics - Disease Index - Drugs - World Directory - Gray's Anatomy - Keto diet - Recipes
Search WikiMD
Ad.Tired of being Overweight? Try W8MD's physician weight loss program.
Semaglutide (Ozempic / Wegovy and Tirzepatide (Mounjaro / Zepbound) available.
Advertise on WikiMD
WikiMD is not a substitute for professional medical advice. See full disclaimer.
Credits:Most images are courtesy of Wikimedia commons, and templates Wikipedia, licensed under CC BY SA or similar.Contributors: Prab R. Tumpati, MD