Posted: June 13th, 2024

Capital Adequacy Ratio

Capital Adequacy Requirement

Capital Adequacy Ratio is part of the modern Cash Adequacy Requirements and tends to be defined as a measure for the banks capacity of absorbing losses via calculation of the ratio of capital to risks (Arnold, et al 2012). In other terms, Capital Adequacy Ratio may be considered as a bank airbag. There are various ways in which bank capital may be interpreted. Generally, this tends to be the difference between the assets and liabilities of the financial organizations (Simshauser 2010).

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Capital Adequacy Ratio (CAR), “Determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk, etc (Simshauser 2010). CAR below the minimum statutory level indicates that the bank is not adequately capitalized to expand its operations. The ratio ensures that the banks do not expand their business without having adequate capital,” (Altman and Sabato 2005).

Capital adequacy requirements are an approach that is utilized by the Australian Prudential Regulation Authority (APRA) in assessment of capital adequacy for the Australian Banks (as well as that of their consolidated groups) (Simshauser 2010). The guideline tends to be focused on the credit risks. Other factors that are accounted for are separate matters when it comes to assessment of the entire capital adequacy for the banks. Such factors incorporates the quality of assets, liquidity, market risks, profitability, adequacy of

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