Question

Q1. Consider the following statements about Capital Adequacy Ratio (CAR):

1. Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities.

2. The risk-weighted assets take into account credit risk only.

Select the correct answer using the codes given:

• A. a) 1 only
• B. b) 2 only
• C. c) Both 1 and 2
• D. d) None of the above

Answer 1

The correct option is A

a) 1 only

Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Capital Adequacy Ratio = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets. The risk weighted assets take into account credit risk, market risk and operational risk.