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| {{Multiple issues
| | The author is called Wilber Pegues. She is truly fond of caving but she doesn't have the time lately. Invoicing is my occupation. Ohio is exactly where her home is.<br><br>My web blog: good psychic ([http://black7.mireene.com/aqw/5741 http://black7.mireene.com/]) |
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| {{Expert-subject|Economics|date=November 2008}}
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| }}
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| '''Capital Adequacy Ratio''' ('''CAR'''), also known as '''Capital to Risk (Weighted) Assets Ratio''' ('''CRAR'''),<ref name="investopedia"/> is the [[ratio]] of a [[bank]]'s [[Financial capital|capital]] to its [[risk]]. [[Bank regulation|National regulators]] track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory [[Capital requirement]]s.
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| ==Formula==
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| Capital adequacy ratios (CARs) are a measure of the amount of a bank's [[Tier 1 capital|core capital]] expressed as a [[percentage]] of its [[risk-weighted asset]].
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| Capital adequacy ratio is defined as:
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| <math>\mbox{CAR} = \cfrac{\mbox{Tier 1 capital + Tier 2 capital}}{\mbox{Risk weighted assets}}</math>
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| TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & b/f losses)
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| TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts
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| where [[Risk]] can either be weighted [[asset]]s (<math>\,a</math>) or the respective [[Bank regulation|national regulator's]] minimum total [[Financial capital|capital]] requirement. If using risk weighted [[asset]]s, | |
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| <math>\mbox{CAR} = \cfrac{T_1 + T_2}{a}</math> ≥ 10%.<ref name="investopedia">{{Cite web | url=http://www.investopedia.com/terms/c/capitaladequacyratio.asp | title=Capital Adequacy Ratio - CAR | publisher=[[Investopedia]] | accessdate=2007-07-10}}</ref> | |
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| 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.
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| Two types of capital are measured: [[Tier 1 capital|tier one capital]] (<math>T_1</math> above), which can absorb losses without a [[bank]] being required to cease trading, and [[Tier 2 capital|tier two capital]] (<math>T_2</math> above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
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| ==Use==
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| Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as [[Credit (finance)|credit]] risk, operational risk etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. [[Bank regulation|Banking regulators]] in most countries define and monitor ''CAR'' to protect depositors, thereby maintaining confidence in the banking system.<ref name="investopedia"/>
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| CAR is similar to [[leverage (finance)|leverage]]; in the most basic formulation, it is comparable to the [[inverse (mathematics)|inverse]] of [[debt]]-to-[[Ownership equity|equity]] leverage formulations (although CAR uses equity over [[assets]] instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). Unlike traditional leverage, however, CAR recognizes that assets can have different levels of [[risk]].
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| ==Risk weighting==
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| Since different types of [[assets]] have different [[risk profiles]], CAR primarily adjusts for assets that are less [[risk]]y 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 Accord]]s. 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.
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| ===Risk weighting example===
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| '''Risk weighted assets - Fund Based''' : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets.
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| '''Non-funded (Off-Balance sheet) Items''' : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the [[Credit Conversion Factor]]. This will then have to be again multiplied by the relevant weightage.
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| Local [[Bank regulation|regulations]] establish that [[cash]] and [[government bonds]] have a 0% risk weighting, and [[residential]] [[mortgage loan]]s have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.
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| ''Bank "A"'' has assets totaling 100 units, consisting of:
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| * Cash: 10 units
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| * Government bonds: 15 units
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| * Mortgage loans: 20 units
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| * Other [[loans]]: 50 units
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| * Other assets: 5 units
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| ''Bank "A"'' has debt of 95 units, all of which are deposits. By definition, [[Ownership equity|equity]] is equal to assets minus debt, or 5 units.
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| Bank A's risk-weighted assets are calculated as follows
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| {| class=wikitable
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| | Cash
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| | <math>10 * 0% = 0</math>
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| |-
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| | Government securities
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| | <math>15 * 0% = 0</math>
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| |-
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| | Mortgage loans
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| | <math>20 * 50% = 10</math>
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| |-
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| | Other loans
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| | <math>50 * 100% = 50</math>
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| |-
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| | Other assets
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| | <math>5 * 100% = 5</math>
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| |-
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| ! colspan=2 | Total risk
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| |-
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| | Weighted assets
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| | 65
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| |-
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| | Equity
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| | 5
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| |-
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| | CAR (Equity/RWA)
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| | 7.69%
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| |}
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| Even though ''Bank would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.
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| ==Types of capital==
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| The [[Basel Accord|Basel rules]] recognize that different types of equity are more important than others. To recognize this, different adjustments are made:
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| # Tier I Capital: Actual contributed equity plus retained earnings.
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| # Tier II Capital: Preferred shares plus 50% of [[subordinated debt]].
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| Different minimum CAR ratios are applied: for example, the minimum [[Tier 1 capital|Tier I]] [[Ownership equity|equity]] allowed by statute for [[risk]]-weighted [[assets]] may be 4%, while the minimum CAR when including [[Tier 2 capital|Tier II capital]] may be 8%.
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| There is usually a maximum of [[Tier 2 capital|Tier II capital]] that may be "counted" towards CAR, which varies by [[jurisdiction]].
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| ==See also==
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| * [[Capital requirement]]
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| * [[Tier 1 capital]]
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| * [[Tier 2 capital]]
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| * [[Basel accord]]s
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| ==References==
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| {{Reflist}}
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| ==External links==
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| * [http://www.investopedia.com/terms/c/capitaladequacyratio.asp Capital Adequacy Ratio] at [[Investopedia]].
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| {{DEFAULTSORT:Capital Adequacy Ratio}}
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| [[Category:Financial economics]]
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| [[Category:Financial ratios]]
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| [[Category:Banking]]
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| [[id:Rasio kecukupan modal]]
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| [[sv:Kapitaltäckning]]
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The author is called Wilber Pegues. She is truly fond of caving but she doesn't have the time lately. Invoicing is my occupation. Ohio is exactly where her home is.
My web blog: good psychic (http://black7.mireene.com/)