Capital Adequacy Ratio

Capital Adequacy Ratio (“CAR”) is a ratio that regulators in the banking system use to watch banks’ health, specifically a bank’s capital to its risk. It determines the capacity of a bank in terms of meeting the liabilities and managing other risks such as credit risk, market risk, and operational risk. It is a measure of how much capital is used to support the bank’s risk assets. The bank’s capital is the ‘cushion’ for potential losses, protecting the bank’s depositors or other lenders. Regulators in the banking system track a bank’s CAR to ensure that it can absorb a reasonable amount of loss.

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