The Capital Adequacy Ratio

Definition

The capital adequacy ratio, or risk asset ratio, determines the minimum level which supervisors require a bank to maintain for the size of its own funds (essentially available capital and reserves) as a proportion of its risk-weighted assets (the amount of money which it has put at risk in the course of its business).

How is it used?

When a bank or other financial institution lends money or deals in financial instruments, it is clearly taking risks. In order to prevent banks from taking excessive risks (and hence to protect the banking system as a whole), the Bank for International Settlements (BIS) in Basel has established guideline limits to the risks which each bank may take. In turn, each country’s ...

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