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    Question

    How capital adequacy ratio is

    calculated:
    A (Tier 1 capital + Tier 2 capital) / Risk weighted assets Correct Answer Incorrect Answer
    B Tier 1 capital / Risk weighted assets Correct Answer Incorrect Answer
    C Total regulatory capital / total assets Correct Answer Incorrect Answer
    D (Tier 1 capital + Tier 2 capital) / total equity Correct Answer Incorrect Answer
    E Tier 2 capital / Risk weighted assets Correct Answer Incorrect Answer

    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.

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