An increase in the risk weight of certain asset classes is a critical factor that directly impacts the Capital Adequacy Ratio (CAR). CAR is calculated by dividing the bank's capital (Tier 1 and Tier 2) by its Risk-Weighted Assets (RWA). An increase in the risk weight of assets would lead to a higher RWA, potentially lowering the CAR if the bank's capital remains unchanged. This change reflects a higher perceived risk in the bank's assets, requiring more capital to maintain the same level of CAR. As such, adjustments in asset risk weights are significant considerations in CAR calculations and overall risk management strategies.

A is incorrect because while marketing strategies to attract more customers might impact the bank's revenues and customer base, they do not directly influence the calculation of the bank's CAR, which is primarily concerned with capital and the risk profile of assets.

B is incorrect because changes in the dividend policy may affect the bank's retained earnings and subsequently its capital, but they do not directly impact the CAR calculation as significantly as changes in the risk weights of assets.

D is incorrect because the launch of a new online banking platform, while important for customer service and operational efficiency, does not directly affect the CAR calculation, which is more closely tied to the bank's capital and the risk assessment of its assets.

Things to Remember

• Under Basel II, the calculation of risk weights for assets is a key component in determining the Risk-Weighted Assets (RWA). The RWA forms the denominator in the CAR calculation.
• Risk weights are assigned to different types of assets based on their risk profile. For example, corporate debt, mortgages, and government securities each have specific risk weights.
• In the Standardized Approach of Basel II, risk weights are prescribed by regulatory authorities and applied uniformly across all banks. This approach does not allow for a detailed risk assessment tailored to individual financial institutions.
• For banks using the Internal Ratings-Based (IRB) Approach, the risk weights can be calculated using the bank's own internal risk assessment models, subject to regulatory approval.