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    Capital Adequacy Ratio

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    meirna.puspita
    The capital adequacy ratio (CAR) measures a bank's capital against its risk-weighted assets. It is used to determine a bank's ability to absorb losses before becoming insolvent. CAR considers Tier 1 capital like equity and reserves, and Tier 2 capital like retained earnings. Risk-weighted assets are calculated by assigning weights to loans based on their risk. A minimum CAR of 8% under Basel II and 10.5% under Basel III is required. A higher CAR indicates a bank is better able to withstand losses from its loan portfolio. Maintaining adequate capital ratios helps ensure the stability of a country's financial system and protects depositor funds.

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    Capital Adequacy Ratio

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    meirna.puspita
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    The capital adequacy ratio (CAR) measures a bank's capital against its risk-weighted assets. It is used to determine a bank's ability to absorb losses before becoming insolvent. CAR considers Tier 1 capital like equity and reserves, and Tier 2 capital like retained earnings. Risk-weighted assets are calculated by assigning weights to loans based on their risk. A minimum CAR of 8% under Basel II and 10.5% under Basel III is required. A higher CAR indicates a bank is better able to withstand losses from its loan portfolio. Maintaining adequate capital ratios helps ensure the stability of a country's financial system and protects depositor funds.

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    Capital Adequacy Ratio (2)

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    The capital adequacy ratio (CAR) measures a bank's capital against its risk-weighted assets. It is used to determine a bank's ability to absorb losses before becoming insolvent. CAR considers Tier 1 capital like equity and reserves, and Tier 2 capital like retained earnings. Risk-weighted assets are calculated by assigning weights to loans based on their risk. A minimum CAR of 8% under Basel II and 10.5% under Basel III is required. A higher CAR indicates a bank is better able to withstand losses from its loan portfolio. Maintaining adequate capital ratios helps ensure the stability of a country's financial system and protects depositor funds.

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    24 views5 pages

    Capital Adequacy Ratio

    Uploaded by

    meirna.puspita
    The capital adequacy ratio (CAR) measures a bank's capital against its risk-weighted assets. It is used to determine a bank's ability to absorb losses before becoming insolvent. CAR considers Tier 1 capital like equity and reserves, and Tier 2 capital like retained earnings. Risk-weighted assets are calculated by assigning weights to loans based on their risk. A minimum CAR of 8% under Basel II and 10.5% under Basel III is required. A higher CAR indicates a bank is better able to withstand losses from its loan portfolio. Maintaining adequate capital ratios helps ensure the stability of a country's financial system and protects depositor funds.

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    Capital Adequacy Ratio

    The capital adequacy ratio (CAR) is an indicator of how well a bank can meet its obligations. Also known as the
    capital-to-risk weighted assets ratio (CRAR), the ratio compares capital to risk-weighted assets and is watched
    by regulators to determine a bank's risk of failure.

    CAR is critical to ensure that banks have a large enough financial cushion to absorb a reasonable amount of
    losses before they become insolvent.

    Currently, the minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% (which includes a
    2.5% conservation buffer) under Basel III

    Assets of Banks (Loans) = Liabilities (depositor’s saving) + Equity


    Capital Measured and Risk-Weighted Assets
    The capital used to calculate the capital adequacy ratio is divided into two tiers.
    Tier-1 Capital
    Tier-1 capital, or core capital, consists of equity capital, ordinary share capital, intangible assets and audited
    revenue reserves. Tier-1 capital is the capital that is permanently and easily available to absorb and cushion
    losses suffered by a bank without it being required to stop operating.

    Tier-2 Capital
    Tier-2 capital comprises unaudited retained earnings, unaudited reserves, and general loss reserves. Tier-2
    capital is the capital that absorbs and cushions losses in the case where a bank is winding up. As such, it provides
    a lesser degree of protection to depositors and creditors. It is used once a bank loses all its Tier-1 capital.

    Risk-Weighted Assets
    Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and
    other institutions to reduce the risk of insolvency. Risk-weighted assets are calculated by looking at a bank's
    loans, evaluating the risk and then assigning a weight.

    Loan is given to a government entity: 0% ;loan is given to an individual: 100%


    Example
    Suppose Acme Bank has $20 million in tier-1 capital and $5 million in tier-2 capital. It has loans that have been
    weighted and calculated at $65 million. The capital adequacy ratio of Acme Bank is therefore 38% (($20 million + $5
    million) / $65 million).

    A CAR of 38% is a high capital adequacy ratio. That means that Acme Bank should be able to weather a financial
    downturn and losses associated with its loans.
    Why the Capital Adequacy Ratio Matters

    Minimum capital adequacy ratios are critical. They can reveal whether individual banks have
    enough financial cushion to absorb a reasonable amount of loss so that they don't become
    insolvent and consequently lose depositors’ funds.

    Broadly, the capital adequacy ratios can help ensure the efficiency and stability of a nation’s
    financial system by lowering the risk of banks collapsing. Generally speaking, a bank with a high
    capital adequacy ratio is considered safe and likely to meet its financial commitments.

    During the winding up process, funds belonging to depositors are given a higher priority than the
    bank’s capital. So depositors are only at risk of losing their savings if a bank registers a loss that
    exceeds the amount of capital it possesses. Thus, the higher the bank’s capital adequacy ratio, the
    higher the degree of protection for depositors' assets.
    Group Assignment
    Please download the annual report of BRI for the year 2022
    Make a review on the availability and clarity of information and use minimum 1 ratio as listed on the
    attachment I of SE OJK number 14 /SEOJK.03/2017 to assess the aspects of Bank Soundness Level below:
    1. Risk (Credit, Market, Liquidity)
    2. Governance (if not possible to use any ratio, please give a qualitative review)
    3. Earnings
    4. Capital Adequacy

    For the regular group presentation:


    Attachment of SE OJK no. 11/2022 on rural bank soundness level

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