The Capital Adequacy Ratio (CAR) is a measure of a banks capital in relation to its risk-weighted credit exposures. It is also known as the Capital to Risk (Weighted) Assets Ratio (CRAR) . The ratio is calculated by dividing a banks capital by its risk-weighted assets. The purpose of the CAR is to ensure that a bank can absorb a reasonable amount of loss and comply with statutory capital requirements. The enforcement of regulated levels of this ratio is intended to protect depositors and promote stability and efficiency of financial systems around the world.

The capital used to calculate the CAR is divided into two tiers: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and provides a lesser degree of protection to depositors. Risk-weighted assets are calculated by evaluating the risk of a banks loans and then assigning a weight. Adjustments are made to the value of assets listed on a lenders balance sheet when measuring credit exposures.

The minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% (which includes a 2.5% conservation buffer) under Basel III. High capital adequacy ratios are those that are higher than the minimum requirements under Basel II and Basel III. A bank with a high CAR is considered safe and likely to meet its financial commitments.

In summary, the CAR is a measure of a banks capital in relation to its risk-weighted credit exposures. It is calculated by dividing a banks capital by its risk-weighted assets. The purpose of the CAR is to ensure that a bank can absorb a reasonable amount of loss and comply with statutory capital requirements. The minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% (which includes a 2.5% conservation buffer) under Basel III. High capital adequacy ratios are those that are higher than the minimum requirements under Basel II and Basel III.