# Capital Adequacy Ratio

## Description

Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk. Capital adequacy ratios (CARs) are a measure of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset.

TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) – (equity investments in subsidiary + intangible assets + current & b/f losses)

TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts

## Variables

CAR | Capital Adequacy Ratio (dimensionless) |

T_{1} | Tier 1 capital (dimensionless) |

T_{2} | Tier 2 capital (dimensionless) |

α_{r} | Risk weighted assets (dimensionless) |