KPI for Measuring of Capital Adequacy Ratio (CAR) posted in category Banking

WinningKPI - Banking - KPI for Measuring of Capital Adequacy Ratio (CAR) posted in category Banking

This indicator is for measuring the bank’s capital ratio, and measures the % of the bank’s risk weighted credit exposures. This is calculated by dividing the sum of tier 1 and tier 2 capital by the risk weighted assets.
In other words, CAR measures the bank’s competence to absorb loss and deal with risk such as credit risk, operational risk etc. The bank’s capital represents the power of dealing with the risk, and also stands as the risk protection the bank is able to give to its customers (depositors and lenders).
The CAR is often included in marketing material in order to attract customers.
Formula:
(T1 + T2 Capital)/ Risk Weighted Assets x 100

KPI Units: %

KPI Time Frame: update annually

Posted by Oana Boteanu | Help to protect community: Flag for moderation

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A simplified way to explain how CAR is calculated is:

CAR= Capital/Risk

This then of course is detailed as in the formula above:
CAR = T1+T2 Capital/ Risk Weighted Assets

As mentioned above, CAR measures the bank’s capital ratio, and capacity to cope with liabilities and risks.
CAR primarily adjusts for assets with lower risk, giving banks the knowledge to ‘discount’ lower-risk assets.

Another aspect to take into account is that the formula, when the bank measures it, is as below:
CAR = (T1+T2 Capital)/ Risk Weighted Assets x 8%

The 8% stands for the minimum standard set by the Bank for International Settlements (BIS).
BIS set this 8% settlement, comprising 4% for Tier 1 capital and the other 4% for T2 capital.
Oana Boteanu | + | September 13, 2012 at 10:11 am

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