capital adequacy ratio
A measure of a bank's capital relative to its risk-weighted assets, used by regulators to ensure banks can absorb losses and remain solvent.
Example
“The bank's 14% capital adequacy ratio was well above the 8% regulatory minimum required by Basel III.”
Memory Tip
CAPITAL ADEQUACY RATIO = is the bank's cushion ADEQUATE? Regulators require minimums.
Why It Matters
Understanding capital adequacy ratio helps you assess the financial stability of banks where you deposit your money or borrow from. A higher ratio means the bank has more cushion to handle financial crises, which protects your deposits and ensures the bank can continue operating even during economic downturns.
Common Misconception
Many people think that a bank with more total assets is automatically safer, but capital adequacy ratio reveals the true picture by measuring how much of those assets are actually owned by the bank versus borrowed. A large bank with low capital adequacy could be riskier than a smaller bank with stronger capital reserves.
In Practice
If Bank A has 100 million dollars in risk-weighted assets and 10 million dollars in capital, its capital adequacy ratio is 10 percent. Regulators typically require a minimum of around 8 percent, so Bank A meets the requirement but has less buffer than Bank B with the same assets but 15 million dollars in capital, giving Bank B a 15 percent ratio and greater financial resilience.
Etymology
CAPITAL (financial cushion) ADEQUACY (sufficiency) RATIO. Whether bank CAPITAL is ADEQUATE relative to risks.
Common Misspellings
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