Answer Posted / ajay saxena
Capital adequacy ratios ("CAR") are a measure of the amount
of a bank's capital expressed as a percentage of its risk
weighted credit exposures.
Capital adequacy ratio is defined as
\mbox{CAR} = \cfrac{\mbox{Capital}}{\mbox{Risk}}
where Risk can either be weighted assets (\,a) or the
respective national regulator's minimum total capital
requirement. If using risk weighted assets,
\mbox{CAR} = \cfrac{T_1 + T_2}{a} ≥ 8%.[1]
The percent threshold (8% in this case, a common requirement
for regulators conforming to the Basel Accords) is set by
the national banking regulator.
Two types of capital are measured: tier one capital (T1
above), which can absorb losses without a bank being
required to cease trading, and tier two capital (T2 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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