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 ratios are calculated by dividing tier one capital and total capital by risk weighted credit exposures. The CAR is important to the investor of the banks because it is an important measure of the financial soundness of a bank and a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations.
