Capital Adequency Ratio

A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as "Capital to Risk Weighted Assets Ratio (CRAR)

This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

Minimum requirements of capital fund in India: 

* Existing Banks 09 % 
* New Private Sector Banks 10 % 
* Banks undertaking Insurance business 10 % 
* Local Area Banks 15% 

Capital Fund has two tiers - Tier I capital include 
*paid-up capital 
*statutory reserves 
*other disclosed free reserves 
*capital reserves representing surplus arising out of sale proceeds of assets. 
Minus 
*equity investments in subsidiaries, 
*intangible assets, and 
*losses in the current period and those brought forward from previous periods 
to work out the Tier I capital. 

Tier II capital consists of: 
*Un-disclosed reserves and cumulative perpetual preference shares: 
*Revaluation Reserves (at a discount of 55 percent while determining their value for inclusion in Tier II capital) 
*General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets: 
*Investment fluctuation reserve not subject to 1.25% restriction 
*Hybrid debt capital Instruments (say bonds): 
*Subordinated debt (long term unsecured loans: 

http://www.bankingindiaupdate.com/car.htm