CAR full form in Banking is Capital Adequacy Ratio. The term uses to measure a bank’s financial power by using its assets and capital. Also called capital to risk-weighted assets ratio, the capital adequacy ratio is used to boost the efficiency and stability of financial systems as well as to protect depositors.

There are two forms of CAR: Tier-1 capital and Tier-2 capital. Tier-2 capital can absorb losses without requiring a financial institution to stop trading. On the other hand, Tier-2 capital can absorb losses at the time of liquidation, which is why it provides less safety to depositors.

To sum up, CAR is vital to ensure that financial institutions (banks) have enough cushion to take up a reasonable amount of losses before they become bankrupt. It is used by regulators to finalize capital sufficiency for banks.

What Else Should You Know About CAR?

In simple words, Capital Adequacy Ratio set measures for the financial institution by looking at a bank’s ability to respond to operational risks and credit risks, and pay liabilities. Banks with good CAR are better able to absorb potential risks and losses, as they may have adequate capital. For this reason, they have less risk of losing depositors’ money and going bankrupt.