What is Capital Adequacy Ratio? What comes in Numerator and denominator?

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Accepted Answer

Capital Adequacy Ratio is a measure of a bank's capital in relation to its risk-weighted assets.

CAR is calculated by dividing a bank's capital (numerator) by its risk-weighted assets (denominator).
The numerator typically includes Tier 1 and Tier 2 capital, such as equity capital and retained earnings.
The denominator consists of various types of assets weighted by their risk levels, such as loans, investments, and off-balance sheet items.
A higher CAR indicates a bank has more capital to absorb potential losses and is considered financially stable.
Regulatory authorities set minimum CAR requirements to ensure banks can withstand financial shocks.
For example, if a bank has $100 million in capital and $1 billion in risk-weighted assets, its CAR would be 10% ($100M / $1B).

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