Define 'capital adequacy ratio.'

Define 'capital adequacy ratio.'

• A. A measure of a bank's capital in relation to its risk-weighted assets
• B. A ratio that indicates the liquidity of a bank
• C. A calculation of total assets divided by total liabilities
• D. A measure of a bank's operational efficiency

Answer: (A)

The capital adequacy ratio (CAR) is indeed defined as a measure of a bank's capital in relation to its risk-weighted assets. This ratio is crucial for assessing the financial stability and risk management capacity of a bank. Regulatory authorities set minimum CAR requirements to ensure that banks maintain enough capital to absorb potential losses while supporting their operations and growth. By calculating the CAR, banks can identify how much of their capital is sufficient to cover risk exposure from various assets, which are weighted according to their risk levels – for instance, loans may have higher risk weights than government bonds. A higher CAR indicates a greater ability of the bank to sustain financial stress or downturns, enhancing confidence among depositors and investors. Other concepts like liquidity, asset-liability calculations, or operational efficiency focus on different aspects of a bank’s financial health, but they do not specifically gauge how well a bank's capital can support its risk exposure, which is the critical insight provided by the capital adequacy ratio.

The capital adequacy ratio (CAR) is indeed defined as a measure of a bank's capital in relation to its risk-weighted assets. This ratio is crucial for assessing the financial stability and risk management capacity of a bank. Regulatory authorities set minimum CAR requirements to ensure that banks maintain enough capital to absorb potential losses while supporting their operations and growth.

By calculating the CAR, banks can identify how much of their capital is sufficient to cover risk exposure from various assets, which are weighted according to their risk levels – for instance, loans may have higher risk weights than government bonds. A higher CAR indicates a greater ability of the bank to sustain financial stress or downturns, enhancing confidence among depositors and investors.

Other concepts like liquidity, asset-liability calculations, or operational efficiency focus on different aspects of a bank’s financial health, but they do not specifically gauge how well a bank's capital can support its risk exposure, which is the critical insight provided by the capital adequacy ratio.