Capital Cover Rate

Written by Evispot. Posted in c, Glossary.

Capital Cover Rate or Capital Adequacy Ratio (CAR) is a measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures. The capital adequacy ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world. 

CAR is critical to ensure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent. CAR is used by regulators to determine capital adequacy for banks and to run stress tests. Two types of capital are measured with CAR. Tier-1 capital can absorb a reasonable amount of loss without forcing the bank to stop its trading, while tier-2 capital can sustain a loss if there’s a liquidation. The downside of using CAR is that it doesn’t account for the risk of a potential run on the bank, or what would happen in a financial crisis.

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