Banks use the capital adequacy ratio to show they can pay what they owe. Regulators check this number to spot banks that might fail. This ratio keeps your money safe at the bank. It helps money systems run well everywhere. Most people call it CRAR - it measures money against loans with risk attached.
Banks keep two types of money for this ratio. They have Tier-1 capital ready for losses right away, and they also count Tier-2 capital from selling stuff after a bank closes. This ratio shows whether banks save enough cash to cover bad times. The bigger this number grows, the safer your money stays.
You figure out CAR by splitting bank money into risky loans. Under Basel II, the rules say banks need at least 8%, but Basel III pushes for 10.5% instead. Banks give each loan a risk score. Loans to governments carry zero risk, but loans to people count as full risk.
Banks count share money, special assets, and checked income as core capital. This money helps them stay open when times turn bad. They also have backup money from unchecked earnings and loss savings. This pays people when banks must close down. Both kinds added together show how strong a bank stands.
Every bank asset gets a risk score. Banks need more safety money for risky letter-backed loans than house loans. Hidden deals carry risks, too. Banks add these to normal loans to find their total risk. Each loan type changes how much safety money they must keep.
Look at Acme Bank, which has $20 million in main money and $5 million in backup funds. Their risky loans total $65 million, which makes their safety ratio 38%. With such a big cushion, Acme could survive bad economic storms and handle loan losses much better than other banks.
These safety numbers show which banks can take reasonable hits. Good ratios prevent banks from failing and losing your savings. They also make money systems work better across all countries. People trust banks with high ratios more, and everyone believes these banks will honor their promises.
Banks pay back regular people first when they close, before using bank money. You lose savings only if bank losses grow bigger than their total money. Higher safety numbers protect your cash better. Strong banks make people feel sure about their money. This trust keeps all banks working well.
The capital ratio works only for banks and shows how they handle loan problems. Other companies use the cash ratio to check if they can pay all bills. Cash ratios below 20% signal danger ahead. Money experts prefer this test because it looks at real dollars. It sees past fancy bookkeeping tricks.
Banks also use the leverage ratio to compare main money with all assets. Higher leverage helps banks weather money troubles. The safety ratio misses some problems during bank panics. Many experts like economic measures better. These check bank health, credit scores, likely losses, and overall safety.
Banks keep two types of money for this ratio. They have Tier-1 capital ready for losses right away, and they also count Tier-2 capital from selling stuff after a bank closes. This ratio shows whether banks save enough cash to cover bad times. The bigger this number grows, the safer your money stays.
You figure out CAR by splitting bank money into risky loans. Under Basel II, the rules say banks need at least 8%, but Basel III pushes for 10.5% instead. Banks give each loan a risk score. Loans to governments carry zero risk, but loans to people count as full risk.
Banks count share money, special assets, and checked income as core capital. This money helps them stay open when times turn bad. They also have backup money from unchecked earnings and loss savings. This pays people when banks must close down. Both kinds added together show how strong a bank stands.
Every bank asset gets a risk score. Banks need more safety money for risky letter-backed loans than house loans. Hidden deals carry risks, too. Banks add these to normal loans to find their total risk. Each loan type changes how much safety money they must keep.
Look at Acme Bank, which has $20 million in main money and $5 million in backup funds. Their risky loans total $65 million, which makes their safety ratio 38%. With such a big cushion, Acme could survive bad economic storms and handle loan losses much better than other banks.
These safety numbers show which banks can take reasonable hits. Good ratios prevent banks from failing and losing your savings. They also make money systems work better across all countries. People trust banks with high ratios more, and everyone believes these banks will honor their promises.
Banks pay back regular people first when they close, before using bank money. You lose savings only if bank losses grow bigger than their total money. Higher safety numbers protect your cash better. Strong banks make people feel sure about their money. This trust keeps all banks working well.
The capital ratio works only for banks and shows how they handle loan problems. Other companies use the cash ratio to check if they can pay all bills. Cash ratios below 20% signal danger ahead. Money experts prefer this test because it looks at real dollars. It sees past fancy bookkeeping tricks.
Banks also use the leverage ratio to compare main money with all assets. Higher leverage helps banks weather money troubles. The safety ratio misses some problems during bank panics. Many experts like economic measures better. These check bank health, credit scores, likely losses, and overall safety.
