Capital Adequacy Ratio

The Capital Adequacy Ratio (CAR) is a measure used by banks to ensure they have enough capital to withstand losses. It compares a bank's capital (its funds) to its risk-weighted assets (the potential losses from loans and investments). A higher CAR indicates a stronger financial position, suggesting the bank can absorb losses better and protect depositors. Regulatory authorities require banks to maintain a minimum CAR to promote stability in the financial system and reduce the risk of bank failures. Think of CAR as a safety net that helps keep banks secure during tough financial times.