A measure of total regulatory capital as a percentage of risk-weighted assets (RWAs). In other words, it reflects the amount of a bank’s total regulatory capital related to the amount of risk it is taking. Assets are weighted by factors representing their respective riskiness and potential for default.
A bank is required to ensure that a reasonable proportion of its risk is covered by its permanent capital. For that reason, banks maintain a minimum total capital ratio.
The capital adequacy ratio, or risk asset ratio, prescribes the minimum level which banking regulators require a bank to maintain for the amount (stock) of its own funds (available capital and reserves) as a proportion of its risk-weighted assets (capital at risk for conducting its core business).
It is known for short as RAR.
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