Capital Adequacy Ratio (CAR)
A bank's available capital as a percentage of risk-weighted assets, measuring its ability to absorb losses.
What is Capital Adequacy Ratio?
The capital adequacy ratio (CAR), also known as the capital-to-risk weighted assets ratio (CRAR), measures the amount of a bank's capital relative to its risk-weighted assets. It is a key regulatory metric designed to ensure that banks maintain sufficient capital buffers to absorb unexpected losses and continue operating under stress. The Basel III framework sets minimum CAR requirements globally: banks must maintain a minimum Tier 1 capital ratio of 6% and a total CAR of 8%, plus a capital conservation buffer of 2.5%. Higher CARs indicate stronger financial health and greater ability to withstand economic shocks without failing.
Example
JPMorgan Chase reported a Common Equity Tier 1 (CET1) capital ratio of 15.0% in Q4 2023 — well above the regulatory minimum of 4.5% for CET1 and the 7% minimum including the conservation buffer. This strong capital position means JPMorgan holds $1.50 in high-quality capital for every $10 of risk-weighted assets, providing a substantial buffer against loan losses.
Source: Basel Committee on Banking Supervision — Basel III Framework