Capital Adequacy Ratio Calculator

Introduction: What this Capital Adequacy Ratio calculator does

The Capital Adequacy Ratio (CAR) is a core regulatory metric that compares a bank’s capital to the risks it has taken on. This calculator helps you compute CAR quickly from three inputs you already have or have estimated elsewhere:

• Tier 1 capital (the highest quality, loss-absorbing capital)
• Tier 2 capital (supplementary capital that provides an additional buffer)
• Risk-weighted assets (RWA) (your total exposures adjusted for regulatory risk weights)

The tool is designed for bank risk and finance teams, analysts, regulators, and advanced students who need a fast way to translate capital and RWA figures into a percentage ratio. It assumes that Tier 1, Tier 2, and RWA amounts have already been calculated in line with the applicable regulatory framework (for example, Basel II, Basel III, or a local implementation).

Capital Adequacy Ratio formula

In plain language, the capital adequacy ratio compares a bank’s regulatory capital to its risk-weighted assets:

CAR = (Tier 1 Capital + Tier 2 Capital) ÷ Risk-Weighted Assets × 100%

Written in MathML, the formula can be represented as:

Where:

• C₁ (Tier 1 capital) = common equity, share premium, retained earnings, and certain disclosed reserves, net of regulatory deductions.
• C₂ (Tier 2 capital) = qualifying subordinated debt, some hybrid instruments, and eligible revaluation or general provisions, subject to regulatory limits.
• RWA = total risk-weighted assets, including credit, market, and operational risk exposures where applicable, after applying risk weights defined by your regulator.

The calculator applies exactly this formula: it sums Tier 1 and Tier 2 capital, divides by RWA, and expresses the result as a percentage.

Understanding the components

Tier 1 capital: core loss-absorbing capital

Tier 1 capital is the primary buffer protecting depositors and senior creditors. It is intended to absorb losses while the bank remains a going concern. Typical elements include:

• Common Equity Tier 1 (CET1) – ordinary shares, share premium, retained earnings, accumulated other comprehensive income, and some reserves.
• Additional Tier 1 (AT1) – certain perpetual instruments with loss-absorbing features (for example, contingent convertible bonds that can convert to equity).

Under Basel-style regulations, Tier 1 quality is tightly defined. Deductions (such as goodwill, certain deferred tax assets, and investments in other financial institutions) can significantly reduce the headline accounting equity number. For this calculator, you should enter regulatory Tier 1 as defined by your jurisdiction, after all relevant adjustments.

Tier 2 capital: supplementary capital

Tier 2 capital provides additional loss absorption in the event of a bank resolution or wind-down. It usually includes:

• Subordinated term debt with sufficient residual maturity
• Certain hybrid capital instruments that do not qualify as Tier 1
• Eligible revaluation reserves and some general provisions or loan-loss reserves, depending on local rules

Tier 2 is considered lower quality than Tier 1 because it may have fixed maturities, contractual interest payments, or lower loss-absorption capacity in stress events. Regulators often cap the amount of Tier 2 that can be counted relative to Tier 1. This calculator does not apply such caps; it simply uses the Tier 2 input you provide.

Risk-weighted assets: adjusting exposures for risk

Not all assets are equally risky. A cash balance held at a central bank is far safer than an unsecured corporate loan. Risk-weighted assets (RWA) reflect this by applying a risk weight to each exposure category. For example, a simplified view might look like:

• 0% risk weight: some sovereign exposures or cash at central banks
• 20% risk weight: certain high-quality bank exposures
• 50% risk weight: some residential mortgage portfolios
• 100% or higher: unsecured corporate loans, equity exposures, high-yield instruments

In modern frameworks, RWA can also include market risk (for trading books) and operational risk, derived from standardized formulas or internal models. This calculator assumes that you have already:

1. Classified your exposures by type,
2. Applied the relevant risk weights, and
3. Summed the results to obtain total RWA.

How to use the calculator

To use the CAR calculator effectively:

1. Determine your Tier 1 capital figure from your regulatory capital report.
2. Determine your Tier 2 capital figure, after applying any limits or haircuts your regulator requires.
3. Obtain your total risk-weighted assets from internal risk reports or regulatory filings.
4. Enter each amount using the same currency. The ratio is currency-neutral; what matters is consistency, not the specific currency.
5. Run the calculation to obtain CAR as a percentage.

The result can be compared to internal targets, regulatory minimums, or peer banks’ ratios.

Interpreting the result

CAR is typically expressed as a percentage, such as 10.5% or 15.2%. Very broadly, and without claiming any universal standard:

• Lower ratios suggest thinner capital buffers relative to risk, increasing vulnerability in stress scenarios.
• Higher ratios indicate more substantial capital cushions, which can support resilience but may reduce return on equity if capital is not efficiently deployed.

Under Basel-style frameworks, many jurisdictions require at least an 8% total capital ratio, with additional buffers such as:

• Capital conservation buffers
• Countercyclical capital buffers
• Systemic risk or G-SIB buffers for large, systemically important banks

Because each jurisdiction can adopt different thresholds, supervisory expectations, and transitional rules, you should always compare your result to the specific minimums and target ranges that apply in your country or region.

Worked examples

Example 1: Baseline capital and RWA

Suppose a regional bank reports:

• Tier 1 capital = 8 billion
• Tier 2 capital = 2 billion
• Risk-weighted assets = 80 billion

Using the formula:

CAR = (8 + 2) ÷ 80 × 100% = 10 ÷ 80 × 100% = 12.5%

If the binding regulatory minimum including buffers is, for example, 10.5%, the bank still has some headroom above the requirement.

Example 2: RWA increases, capital unchanged

Now assume that credit quality deteriorates or the portfolio shifts towards riskier assets, increasing risk weights so that RWA rises to 100 billion, while capital remains unchanged:

• Tier 1 capital = 8 billion
• Tier 2 capital = 2 billion
• Risk-weighted assets = 100 billion

The new CAR is:

CAR = (8 + 2) ÷ 100 × 100% = 10 ÷ 100 × 100% = 10%

Even though the nominal capital base has not changed, the ratio falls because the bank is now taking more risk per unit of capital. This illustrates how CAR is sensitive to both the volume and the riskiness of exposures.

Example 3: Raising capital, RWA constant

Consider a bank that strengthens its capital position through a new equity issue, while its RWA stays at 80 billion:

• Tier 1 capital increases from 8 billion to 9 billion
• Tier 2 capital remains at 2 billion
• Risk-weighted assets = 80 billion

The CAR becomes:

CAR = (9 + 2) ÷ 80 × 100% = 11 ÷ 80 × 100% = 13.75%

In this scenario, capital has increased relative to risk, improving the bank’s resilience and providing greater margin over regulatory minimums.

Comparison with related capital ratios

The total capital adequacy ratio is closely related to other regulatory metrics. The table below summarizes some common ratios and how they compare conceptually.

While this calculator focuses on the total capital adequacy ratio, interpreting results in combination with CET1, Tier 1, and leverage ratios can give a more complete view of a bank’s capital position.

Assumptions, limitations, and important notes

This calculator is intentionally simple and makes several important assumptions. Understanding these limitations is essential before using the output in any decision-making context.

Key assumptions

• Pre-computed inputs: The tool assumes that Tier 1, Tier 2, and RWA figures are already calculated in full compliance with your applicable regulatory rules.
• No automatic regulatory adjustments: It does not implement deductions, filters, or transitional arrangements (for example, phase-ins of new standards). Those must be reflected in the inputs you provide.
• No caps or limits on Tier 2: Some frameworks limit how much Tier 2 can count towards total capital. This calculator does not apply those constraints; it simply uses the value you enter.
• Single consolidated view: The ratio is calculated on the basis of the aggregated numbers you input; it does not distinguish between subsidiaries, business lines, or exposure classes.
• Static point-in-time calculation: The tool gives a snapshot ratio. It does not project future capital levels or simulate stress scenarios over time.

What the calculator does not do

• It does not compute risk-weighted assets from raw exposure data.
• It does not distinguish between Basel II, Basel III, or emerging Basel IV treatments, nor between different national implementations.
• It does not calculate CET1, Tier 1, liquidity coverage, net stable funding, or leverage ratios.
• It does not check whether your result satisfies any particular jurisdiction’s minimum requirements or buffers.

Regulatory context varies by jurisdiction

Global standards such as the Basel framework are implemented differently across countries and regions. Supervisors may:

• Set different minimum ratios and buffer levels,
• Define national discretion items (for example, treatment of certain exposures), and
• Apply additional requirements to systemically important institutions.

As a result, two banks with the same CAR calculated here might face different supervisory assessments. Always refer to official regulations, supervisory guidance, and internal risk policies when interpreting your results.

Educational and informational use only

This calculator is provided for educational and illustrative purposes. It is not a substitute for professional advice, regulatory reporting systems, or internal risk models. You should not rely on the output as the sole basis for any regulatory filings, investment decisions, or risk management actions. When in doubt, consult your regulator, auditors, or qualified risk professionals.

Practical tips for using CAR in analysis

• Track trends over time: Monitoring CAR quarterly or monthly can highlight whether your capital buffer is gradually eroding or strengthening.
• Run simple scenarios: Adjust Tier 1, Tier 2, or RWA inputs to see how raising capital, changing portfolio composition, or de-risking the balance sheet would affect the ratio.
• Compare with peers carefully: Peer comparisons are useful, but differences in business models, risk profiles, and national rules mean that direct comparisons can be imperfect.
• Combine with other metrics: Use CAR together with CET1 and leverage ratios to avoid relying on a single indicator.

Used thoughtfully and with awareness of its limitations, the capital adequacy ratio remains a central indicator of banking resilience and a cornerstone of prudential regulation worldwide.