What is the meaning of capital adequacy ratio?

The capital adequacy ratio (CAR) is a measure of how much capital a bank has available, reported as a percentage of a bank’s risk-weighted credit exposures. The purpose is to establish that banks have enough capital on reserve to handle a certain amount of losses, before being at risk for becoming insolvent.

What is car in banking terms?

What Is Capital Adequacy Ratio – CAR? The capital adequacy ratio (CAR) is a measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures.

What is capital ratio formula?

The working capital ratio is calculated simply by dividing total current assets by total current liabilities. For that reason, it can also be called the current ratio. It is a measure of liquidity, meaning the business’s ability to meet its payment obligations as they fall due.

What is a good capital adequacy ratio for banks?

The risk-weighted assets take into account credit risk, market risk and operational risk. As of 2019, under Basel III, a bank’s tier 1 and tier 2 capital must be at least 8 per cent of its risk-weighted assets. The minimum capital adequacy ratio (including the capital conservation buffer) is 10.5 per cent.

What is Tier 1 and Tier 2 capital?

Tier 1 capital is the primary funding source of the bank. Tier 1 capital consists of shareholders’ equity and retained earnings. Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves.

What is included in Tier 2 capital?

2 Elements of Tier II Capital: The elements of Tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt and investment reserve account.

What does RWA mean in banking?

Risk-Weighted Assets
What Are Risk-Weighted Assets? Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and other financial institutions in order to reduce the risk of insolvency.

How is RWA calculated?

Banks calculate risk-weighted assets by multiplying the exposure amount by the relevant risk weight for the type of loan or asset. A bank repeats this calculation for all of its loans and assets, and adds them together to calculate total credit risk-weighted assets.

What is Tier 1 and Tier 2 and Tier 3 capital?

Tier 1 capital is intended to measure a bank’s financial health; a bank uses tier 1 capital to absorb losses without ceasing business operations. Regulators use the capital ratio to determine and rank a bank’s capital adequacy. Tier 3 capital consists of subordinated debt to cover market risk from trading activities.

What is another name for Tier 2 capital?

Tier 2 Capital is known a bank’s supplementary capital. This is capital that is seen as being of a higher risk than its Tier 1 core capital partners. The capital that falls within the definition of Tier 2 is revaluation reserve, undisclosed reserves, and subordinate debt.

Which is the best definition of a coverage ratio?

A coverage ratio is a group of measures of a company’s ability to service its debt and meet its financial obligations such as interests payments or dividends.

What does it mean to have a capital loss coverage ratio?

The capital loss coverage ratio is an expression of how much transaction assistance is provided by a regulatory body in order to have an outside investor take part. To see the potential difference between coverage ratios, let’s look at a fictional company, Cedar Valley Brewing.

Which is better debt capacity or coverage ratio?

Debt Capacity Debt capacity refers to the total amount of debt a business can incur and repay according to the terms of the debt agreement. . A higher ratio indicates a greater ability of the company to meet its financial obligations while a lower ratio indicates a lesser ability.

What does it mean to have a high interest coverage ratio?

Related Terms. A coverage ratio is a group of measures of a company’s ability to service its debt and meet its financial obligations such as interests payments or dividends. The higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends.