The capital adequacy ratio (CAR) is a critical financial metric that measures a bank's ability to absorb potential losses. It ensures banks have enough capital to continue operating even during financial stress.
The Basel Committee sets minimum CAR requirements to keep banks worldwide stable and protect depositors' money.
The formula is: CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets (RWA). Tier 1 Capital is core capital like shareholders' equity and retained earnings. Tier 2 Capital is supplementary capital like subordinated debt and general reserves.
In Bangladesh, Bangladesh Bank follows international Basel guidelines and has set a minimum CAR of 10% for banks — higher than the international minimum of 8%.