Economics • Banking & FinanceEasy
What does the term 'Capital Adequacy Ratio (CAR)' measure for a bank?
A. The ratio of a bank's capital to its risk-weighted assets.✓ Correct Answer
B. The proportion of cash reserves maintained with the central bank.
C. The amount of bad loans written off annually.
D. The ratio of net profits to total operating expenses.
💡 Solution & Explanation
The Capital Adequacy Ratio measures a bank's financial stability by expressing its capital as a percentage of its risk-weighted credit exposures, ensuring a buffer against unexpected losses. Distractors like cash reserves refer instead to the Cash Reserve Ratio, which dictates liquid funds kept with the central bank. Basel norms regulate these international banking standards to safeguard global financial systems.
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