How capital adequacy ratio is

Solution

The capital adequacy ratio (CAR) is a measure of a bank's capital strength and its ability to absorb losses. It is calculated by dividing the bank's regulatory capital by its risk-weighted assets. Regulatory capital includes two components: Tier 1 capital and Tier 2 capital. Risk-weighted assets (RWAs) are a bank's assets weighted according to the level of risk associated with each asset. Assets with higher risk are assigned a higher weight, while assets with lower risk are assigned a lower weight.