Economics • Banking & FinanceMedium
What does the term 'Capital Adequacy Ratio' measure for commercial banks under Basel norms?
A. The ratio of liquid cash reserves maintained against total daily demand deposits
B. The proportion of a bank's capital to its risk-weighted assets, ensuring resilience against losses✓ Correct Answer
C. The percentage of non-performing loans written off against annual operating profits
D. The proportion of short-term borrowings funded through inter-bank call money markets
💡 Solution & Explanation
The Capital Adequacy Ratio evaluates a bank's financial strength by comparing its capital base against its risk-weighted assets, safeguarding depositors against potential credit defaults. Cash reserve ratios govern liquid deposits maintained with the central bank. Non-performing asset ratios track loan recovery health rather than capital buffers. Basel III norms stipulate stringent capital thresholds to maintain systemic stability across international banking networks.
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