This Capital Adequacy Ratio Calculator can help you measure a bank’s capital in the form of a percentage of its risk weighted credit exposure, which indicates at which extent the depositors are protected. You can find more information on this topic right after the tool.
How does this capital adequacy ratio calculator work?
In financial industry this ratio (CAR) is often referred to asCapital to Risk Weighted Assets Ratio (CRAR) and is used across the world to assess how much protection do depositors have against losses and how stable a financial system/institution is. The minimum level required varies from one financial system/country to another.
The algorithm of this capital adequacy ratio calculator uses the formula explained below while considering the following variables that should be known:
Capital Adequacy Ratio = (Tier 1 Capital + Tier 2 Capital)/Risk Weighted Assets
Tier One Capital (T1C) is the core capital of a bank, meaning that by considering this financial resource the bank will not requested to cease trading in case of losses. Practically this is the figure showing the financial strength of a bank and usually includes common stocks, retained earnings/disclosed reserves and by case it may include as well non-cumulative preferred stock. However, since these aspects are regulated, the financial instruments that may count in the Tier 1 calculation may differ from one country/regular to another depending on their approach on risk and on how much protection is required against unexpected losses.
There are two methods used to determine the Tier 1 capital ratio:
-Tier 1 common capital ratio – proportion of a bank’s core equity capital (the non-controlling interests and the preferred shares are excluded from the core equity capital) against its total risk-weighted assets (RWA)
-Tier 1 total capital ratio - proportion of a bank’s core equity capital (the non-controlling interests and the preferred shares are included in the figure of the core equity capital) against its total risk-weighted assets (RWA).
Tier Two Capital also called supplementary capital consists of items such as: revaluation reserves in case a bank’s assets register an increase in their value; undisclosed reserves; subordinated debts – usually these are considered to be the debts the bank has generated by deposits with a maturity of over 5 years; or general provisions for losses that have not been yet determined.
Risk Weighted Assets (RWA) which are the assets (grouped within classes) a bank owns weighted by credit risk considering the regulations and the formula imposed by the Regulator. By this methodology every asset is evaluated by taking account of its risk profile.04 Jun, 2015 | 0 comments