Learn what the capital adequacy ratio measures, why it matters to regulators, and how it connects bank capital to risk-weighted assets.
The capital adequacy ratio measures a bank’s capital relative to its risk-weighted assets.
This page uses the fully spelled-out name for the same core metric commonly shortened to CAR.
At a high level, the ratio asks:
“Does the bank have enough loss-absorbing capital for the risks it is taking?”
That matters because banks fund themselves largely with deposits and other liabilities, so regulators want a clear capital buffer between losses and insolvency.
The exact regulatory definition of capital can be detailed and technical, but the basic idea is consistent: compare bank capital with the riskiness of the assets being financed.
Not all assets create the same danger of loss.
That is why regulators do not judge adequacy using only raw total assets. They weight exposures according to risk.
A loan portfolio with weaker borrowers creates a different capital need than a balance sheet concentrated in safer exposures.
The capital adequacy ratio matters because it affects:
If the ratio deteriorates too far, the bank may need to raise capital, retain earnings, or shrink risky assets.
In practice, capital adequacy ratio and capital adequacy ratio (CAR) refer to the same concept.
The difference is mainly wording, not substance.
The ratio is important, but it does not solve every banking question.
A bank can still have problems from:
So the ratio should be read alongside broader banking and credit indicators.