Capital Adequacy Ratio Calculator
| Requirement | Basel III Standard | Your Bank | Status |
|---|---|---|---|
| Minimum Total CAR | 8% | - | - |
| Minimum Tier 1 CAR | 6% | - | - |
| Common Equity Tier 1 | 4.5% | - | - |
The Capital Adequacy Ratio (CAR) measures a bank's capital in relation to its risk-weighted assets. It ensures banks can absorb reasonable losses and protects depositors.
• Core capital including common stock
• Disclosed reserves and retained earnings
• Must be at least 6% of risk-weighted assets
• More liquid and reliable than Tier 2
• Supplementary capital including revaluation reserves
• Hybrid instruments and subordinated debt
• Must not exceed 100% of Tier 1 capital
• Less reliable than Tier 1 capital
| Date | Tier 1 Capital | Tier 2 Capital | Risk-Weighted Assets | Total CAR | Currency | Actions |
|---|
Capital Adequacy Ratio: Your Complete Guide
Understand how banks measure financial strength with this simple guide and interactive calculator
Have you ever wondered how banks prove they're financially strong enough to handle tough times? That's where the Capital Adequacy Ratio (CAR) comes in - it's like a bank's financial safety net!
This guide breaks down everything you need to know about CAR in simple terms, complete with real examples, easy formulas, and our interactive calculator that does all the math for you.
What is Capital Adequacy Ratio?
Simple Definition
The Capital Adequacy Ratio (CAR) is a measure of a bank's financial strength. It shows how much capital a bank has compared to its risky assets. Think of it as a cushion that protects the bank (and its customers) from unexpected losses.
In simpler terms: If a bank makes bad loans or investments, CAR measures how much of its own money (capital) is available to absorb those losses before customers' deposits are at risk.
Real-World Example:
Imagine a bank with:
- Safe capital: $1,000,000
- Risky loans: $8,000,000
- CAR calculation: $1,000,000 ÷ $8,000,000 × 100 = 12.5%
This means for every $100 of risky loans, the bank has $12.50 of its own money as protection.
Try Our Capital Adequacy Ratio Calculator
No complex math needed! Enter your numbers and instantly see if you meet Basel III requirements.
The CAR Formula Made Simple
The Basic Formula:
Expressed as a percentage
Let's break down each part of this formula:
1. Tier 1 Capital - The "Strong" Money
Tier 1 Capital is the highest quality capital a bank has. It's money that can absorb losses immediately.
What's in Tier 1 Capital:
- Common stock: Money from shareholders
- Retained earnings: Profits kept in the bank
- Disclosed reserves: Money set aside for losses
Example: A bank with $500,000 in common stock and $500,000 in retained earnings has $1,000,000 in Tier 1 Capital.
2. Tier 2 Capital - The "Backup" Money
Tier 2 Capital is supplementary capital - less reliable but still important protection.
What's in Tier 2 Capital:
- Undisclosed reserves: Hidden reserves
- Hybrid instruments: Mix of debt and equity
- Subordinated debt: Debt that gets paid last
Example: A bank with $300,000 in subordinated debt and $200,000 in hybrid instruments has $500,000 in Tier 2 Capital.
3. Risk-Weighted Assets - The "Risky Stuff"
Risk-Weighted Assets are the bank's assets (like loans) adjusted for how risky they are.
How Risk Weighting Works:
- Government bonds: 0% risk (very safe)
- Home mortgages: 35-50% risk (moderate)
- Credit card loans: 100% risk (very risky)
Example: A $1,000,000 government bond counts as $0 in risk-weighted assets, while a $1,000,000 credit card portfolio counts as $1,000,000.
Putting It All Together: Complete Example
Complete CAR Calculation:
Bank ABC has:
- Tier 1 Capital: $1,000,000
- Tier 2 Capital: $500,000
- Risk-Weighted Assets: $8,000,000
This bank has a very strong CAR of 18.75% - well above regulatory requirements!
Basel III Requirements: What's Required?
Basel III is the international banking regulation that sets CAR standards. Here's what banks need to meet:
| Requirement | Minimum | Recommended | What It Means |
|---|---|---|---|
| Total CAR | 8% | 10.5% | Overall capital strength |
| Tier 1 CAR | 6% | 8.5% | High-quality capital strength |
| CET1 Ratio | 4.5% | 7% | Pure equity capital strength |
Pro Tip: Safety Margins Matter
Smart banks aim for CARs well above minimums. A 10-12% CAR provides a comfortable safety margin, while 15%+ is considered very strong. This extra cushion helps during economic downturns.
Why CAR Matters: Three Key Reasons
Customer Protection
Higher CAR means better protection for depositors' money. If the bank faces losses, its own capital absorbs them first.
Financial Stability
Banks with strong CARs can weather economic storms better. They're less likely to fail during recessions.
Investor Confidence
Investors and regulators trust banks with strong CARs. This leads to better borrowing rates and more business opportunities.
How to Use Our CAR Calculator (Step by Step)
Step 1: Enter Tier 1 Capital
Enter your bank's highest quality capital. If you're not sure, include:
- Common stock and retained earnings
- Disclosed reserves
- Other core capital items
Step 2: Enter Tier 2 Capital
Enter supplementary capital items:
- Undisclosed reserves (if applicable)
- Hybrid capital instruments
- Subordinated term debt
Step 3: Enter Risk-Weighted Assets
This is the trickiest part. If you don't have exact figures, estimate based on:
- Total loans × average risk weight
- Or use our default example to understand the concept
Quick Tip for Beginners
Start with our default values to see how the calculator works. Then replace them with your actual numbers. Our calculator supports 50+ currencies!
Understanding Your Results
After calculating, you'll see three key results:
Total CAR
Below 8%: Regulatory action required
8-10.5%: Minimum compliance
10.5-15%: Strong position
15%+: Excellent strength
Tier 1 CAR
Below 6%: Insufficient core capital
6-8.5%: Meets requirements
8.5-12%: Strong core capital
12%+: Exceptional quality
Regulatory Status
Compliant: All requirements met
Borderline: Close to minimums
Non-Compliant: Below requirements
Strongly Capitalized: Well above requirements
Frequently Asked Questions (15 Common Questions)
Final Thoughts: Why CAR Matters to Everyone
While Capital Adequacy Ratio might seem like banking jargon, it actually affects everyone:
For Depositors
Higher CAR means your money is safer. Banks with strong capital buffers are less likely to fail during economic downturns.
For Investors
CAR is a key indicator of financial health. Banks with strong CARs tend to be more stable investments, though they might have lower returns.
For the Economy
Well-capitalized banks support economic stability. They can continue lending during crises, helping businesses survive tough times.
Remember:
Capital Adequacy Ratio isn't just a regulatory requirement - it's a measure of financial responsibility. Whether you're a banker, investor, or just someone with a bank account, understanding CAR helps you make smarter financial decisions.