What does capital adequacy ratio (CAR) measure?

The capital adequacy ratio (CAR) is a critical measure that assesses a bank's capital in relation to its risk-weighted assets. It reflects the stability and financial health of the bank by determining how much capital is available to absorb potential losses, thereby ensuring that the bank can continue to operate and meet its obligations even under adverse economic conditions. A higher CAR indicates that a bank has a larger buffer to cover its risks, promoting confidence among depositors and investors.

In the banking context, having a sufficient capital adequacy ratio is essential for regulatory compliance and risk management, as it helps regulators monitor the health of financial institutions and maintain stability within the financial system.