Is capital ratio and capital adequacy ratio same?

The capital adequacy ratio (CAR), also known as capital to risk-weighted assets ratio, measures a bank’s financial strength by using its capital and assets.

What is the relationship between risk based capital requirement and leverage ratio requirement?

The leverage ratio indicates the maximum loss that can be absorbed by equity, while the risk-based requirement refers to a bank’s capacity to absorb potential losses.

What happens when capital adequacy ratio increases?

The capital adequacy ratios ensure the efficiency and stability of a nation’s financial system by lowering the risk of banks becoming insolvent. Generally, a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations.

Should CASA ratio be high or low?

CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds, because banks do not usually give any interests on current account deposits and the interest on saving accounts is usually very low 3-4\%.

How is CASA ratio calculated?

Current Account Savings Account Ratio The CASA ratio indicates how much of a bank’s total deposits are in both current and savings accounts. The ratio can be calculated using the following formula: CASA Ratio = CASA Deposits ÷ Total Deposits.

What is ideal capital adequacy ratio?

Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8\%. 1 The capital adequacy ratio measures a bank’s capital in relation to its risk-weighted assets. With higher capitalization, banks can better withstand episodes of financial stress in the economy.

Is leverage ratio the same as capital ratio?

The Tier 1 leverage ratio measures a bank’s core capital to its total assets. The ratio uses Tier 1 capital to judge how leveraged a bank is in relation to its consolidated assets, whereas the Tier 1 capital ratio measures the bank’s core capital against its risk-weighted assets.

What is the difference between capital ratio and leverage ratio?

Leverage ratio – while capital adequacy ratio considers the ratio of risk-weighted assets (mainly loans) to capital, leverage ratio takes the available capital and divides it by the total assets.

How can a bank improve its capital adequacy ratio?

A bank that seeks to increase its risk-adjusted capital ratio has a number of options at its disposal. One set of strategies targets the bank’s retained earnings. The bank could seek to reduce the share of its profit it pays out in dividends. Alternatively, it may try to boost profits themselves.

What happens when capital adequacy ratio decreases?

When the ratio is low, a bank is at a higher risk of failure, and so may be required by the regulatory authorities to add more capital.

Why CASA ratio is important for banks?

Financial institutions encourage the use of a CASA because it generates a higher profit margin. Because the interest paid on the CASA deposit is lower than on a term deposit, the bank’s net interest income (NII) is higher. Thus, CASAs can be a cheaper source of funding for banks.

What is CASA ratio in banks?

CET1 is a measure of bank solvency that gauges a bank’s capital strength. This measure is better captured by the CET1 ratio, which measures a bank’s capital against its assets.