Capital adequacy ratio

Capital adequacy ratio

What is the capital adequacy ratio?

The capital adequacy ratio is actively used in the regulation of the activities of financial institutions. It can be defined in several ways. First, it is the ratio of a bank's capital to its risk-weighted assets and current liabilities (credit exposures). Since loans dominate the bank's assets, the CAR is an indicator of the collateralization of the issued loans with the bank's funds.

The role of the ratio is in establishing certain standards for banks. This way, everyone gets an opportunity to measure the investment attractiveness of banks for investors and depositors or to understand the safety of a credit.

To comply with regulatory requirements, a financial institution must either increase its equity capital or reduce its assets and loan volume. Thus, banks are forced to abandon risky operations, which ultimately increases the level of financial stability.

Capital Adequacy Ratio = (Tier-I + Tier-II (Capital funds)) /Risk weighted assets

Tier-I is core capital, such as equity and disclosed reserves, and Tier-II is supplemental capital.

What do you need to know about the capital adequacy ratio?

To measure the average CAR value, Basel Accord was created in 1988. There we can find several editions with requirements for banks and other financial institutions.

The Basel III norms stipulated a capital to risk-weighted assets of 10.5%. However, some Indian banks have to maintain a CAR of 9-12%. If the bank fails to comply with requirements, the company may be called insolvent, which means that the bank doesn't have enough assets to absorb enough losses.

For example, let's imagine that bank JPM has $100 million in tier-I capital and $50 million in tier-II capital. The loans of the bank have been weighted and calculated as $500 million. The CAR of bank JPM is 30 percent (($100 + $50) / $500). Therefore, JPM has an extremely high capital adequacy ratio (3 times the requirements). As a result, JPM is less likely to become insolvent if unexpected losses occur. 

In a nutshell, a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations.

Back

2024-03-14 • Updated

Frequently asked questions

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to open an FBS account?

    Click the 'Open account' button on our website and proceed to the Trader Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading.

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Trader Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera