Capital Adequacy Ratio (CAR) Calculator & Basel III Lab
Model Basel III regulatory capital tiers (CET1, Tier 1, Tier 2), Risk-Weighted Assets (RWA), Prompt Corrective Action (PCA) status, and unexpected loss shock absorption.
Institutional Capital Presets
Regulatory Capital & Risk Inputs
Enter bank balance sheet capital components and risk-weighted assets in thousands ($000).
1. Tier 1 Capital (Going-Concern)
2. Tier 2 Capital (Gone-Concern)
3. Risk-Weighted Assets & Leverage
4. Regulatory Hurdle & Buffers
Basel III Capital Stack & Leverage Diagnostic
| Tier 1 Capital (Going-Concern): | $2,500,000k | CET1 ($2,300,000k) + Additional Tier 1 ($200,000k) |
| Total Qualifying Regulatory Capital: | $2,900,000k | Tier 1 Capital + Tier 2 Capital ($400,000k) |
| Tier 1 Risk-Based Ratio: | 12.50% | Min requirement: 6.0% (8.5% with CCB) |
| Tier 1 Leverage Ratio: | 8.93% | Tier 1 Capital / Leverage Exposure (Min 4.0% / 5.0% PCA) |
| RWA Density Ratio: | 71.43% | Risk-Weighted Assets / Total Leverage Exposure |
| Max RWA Shock Capacity: | +$7,619,048k | RWA growth or credit downgrade shock absorbed before breaching 10.50% |
Capital Adequacy Sensitivity Analysis Matrices
Sensitivity Grid 1: Total Capital vs RWA (Capital Adequacy Ratio %)
Evaluates how changes in qualifying regulatory capital and risk-weighted asset inflation affect the bank's total CAR.
Sensitivity Grid 2: CET1 Capital vs Target Hurdle (CET1 Surplus / Deficit $000)
Projects capital surplus or deficit dollars as common equity tiers fluctuate against evolving supervisory buffers.
Worked Calculation & Mathematical Specification
The Capital Adequacy Ratio (CAR) establishes the minimum proportion of loss-absorbing regulatory capital a banking institution must hold relative to the riskiness of its asset portfolio. Developed by the Basel Committee on Banking Supervision (BCBS), CAR prevents balance sheet insolvency and financial contagion.
$$\text{Tier 1 Capital} = \text{Common Equity Tier 1 (CET1)} + \text{Additional Tier 1 (AT1)}$$
$$\text{Total Regulatory Capital} = \text{Tier 1 Capital} + \text{Tier 2 Capital}$$
$$\text{Capital Adequacy Ratio (CAR)} = \frac{\text{Total Regulatory Capital}}{\text{Risk-Weighted Assets (RWA)}} \times 100\%$$
$$\text{CET1 Ratio} = \frac{\text{CET1 Capital}}{\text{RWA}} \times 100\%$$
$$\text{Tier 1 Risk-Based Ratio} = \frac{\text{Tier 1 Capital}}{\text{RWA}} \times 100\%$$
$$\text{Tier 1 Leverage Ratio} = \frac{\text{Tier 1 Capital}}{\text{Total Leverage Exposure}} \times 100\%$$
$$\text{Capital Surplus Buffer (\$)} = \text{Total Capital} - (\text{Minimum Target CAR \%} \times \text{RWA})$$
Step-by-Step Calculation Walkthrough (Current Simulation State)
| Step | Capital Operation | Formula | Calculation | Result |
|---|
Prudential Regulatory Framework Takeaways
- The Basel III Capital Stack: Regulators mandate that the vast majority of capital be held in CET1 (tangible common equity and retained earnings) because preferred equity and debt cannot absorb unexpected credit write-downs without diluting or restructuring the bank.
- Capital Conservation Buffer (CCB): Holding CAR above 10.5% (8.0% minimum + 2.5% CCB) protects the bank from regulatory distribution constraints on shareholder buybacks, dividends, and executive bonus pools.
- Prompt Corrective Action (PCA): Falling below 8.0% Total CAR or 6.0% Tier 1 triggers mandatory supervisory intervention, restriction of asset growth, and FDIC oversight.
Capital Adequacy & Basel III Knowledge Check Quiz
Test your mastery of bank capital tiers, risk-weighted assets, leverage constraints, and prudential supervisory rules.
1. If a bank holds $3,000,000,000 in qualifying total regulatory capital and $25,000,000,000 in risk-weighted assets (RWA), what is its Capital Adequacy Ratio (CAR)?
2. Why does Basel III emphasize Common Equity Tier 1 (CET1) over Tier 2 subordinated debt?
3. What is the consequence if a bank's Total CAR falls below 10.5% into the Capital Conservation Buffer (CCB) range under Basel III?
4. How does the Tier 1 Leverage Ratio differ from the Risk-Based Tier 1 Ratio?
Frequently Asked Questions
What is the Capital Adequacy Ratio (CAR) and how is it calculated?
The Capital Adequacy Ratio (CAR), also known as the Capital-to-Risk Weighted Assets Ratio (CRAR), measures a bank's available regulatory capital expressed as a percentage of its risk-weighted credit, market, and operational assets: CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets (RWA). It ensures that financial institutions absorb unexpected loan defaults and maintain solvency without taxpayer bailouts.
What are the key differences between Tier 1 Capital, CET1, and Tier 2 Capital?
Common Equity Tier 1 (CET1) is the highest quality gone-concern loss-absorbing capital, consisting of common stock, retained earnings, and accumulated other comprehensive income. Total Tier 1 capital adds non-cumulative perpetual preferred equity. Tier 2 capital consists of supplementary subordinated debt, hybrid instruments, and general loan-loss allowances up to 1.25% of credit risk-weighted assets.
What are the minimum Basel III regulatory capital requirements and buffers?
Under international Basel III standards, banks must maintain a minimum CET1 ratio of 4.5%, a minimum Tier 1 ratio of 6.0%, and a minimum Total Capital (CAR) ratio of 8.0%. In addition, banks must hold a 2.5% Capital Conservation Buffer (CCB) of CET1, raising effective hurdle rates to 7.0% CET1, 8.5% Tier 1, and 10.5% Total CAR to avoid restrictions on dividends and discretionary executive bonuses.
How do bank regulators determine Prompt Corrective Action (PCA) categories?
In the United States, the FDIC categorizes depository institutions under Prompt Corrective Action (PCA) thresholds into: (1) Well Capitalized (Total CAR >= 10.0%, Tier 1 >= 8.0%, CET1 >= 6.5%, Leverage >= 5.0%); (2) Adequately Capitalized; (3) Undercapitalized; (4) Significantly Undercapitalized; and (5) Critically Undercapitalized (Tangible Equity <= 2.0%), which triggers mandatory receivership within 90 days.