What does a high capital adequacy ratio indicate?

High capital adequacy ratios are above the minimal requirements underneath Basel II and Basel III. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the danger of a run on the financial institution.

What is the minimum capital adequacy ratio under Basel III?

Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. The capital adequacy ratio measures a bank’s capital in relation to its risk-weighted assets. The capital-to-risk-weighted-assets ratio promotes financial stability and efficiency in economic systems throughout the world.

How capital adequacy ratio of a bank is arrived?

The capital adequacy ratio is calculated by dividing a bank's capital by its risk-weighted assets. The capital used to calculate the capital adequacy ratio is divided into two tiers. Tier-1 capital, or core capital, consists of equity capital, ordinary share capital, intangible assets and audited revenue reserves.

What is meant by capital adequacy?

The capital adequacy ratio weighs up a bank’s capital against its risk. The calculation is shown as a percentage of a bank's risk weighted credit exposures. This ratio ensures banks have enough capital to cover potential losses, which protects them from insolvency. The higher the ratio, the more stable and efficient the bank is and the less likely it is to become insolvent.