To calculate the Capital Adequacy Ratio (CAR), the sum of Tier 1 and Tier 2 capital is divided by the bank's Risk-Weighted Assets (RWA). In this scenario, the bank's Tier 1 capital is $200 million, and its Tier 2 capital is $100 million, making the total capital $300 million. The RWA is $2 billion. Therefore, the CAR is calculated as follows:

$$\text{CAR} = \frac{\text{Capital}}{\text{Risk weighted Assets}} = \frac{200 + 100}{2000} = 0.15$$

Things to Remember

• The CAR is a crucial measure for banks to ensure they have adequate capital to cover the risk associated with their assets, enhancing financial stability and resilience.
• Under Basel II, banks are required to maintain a minimum CAR, usually not less than 8%, to safeguard against periods of financial stress.
• Understanding and accurately calculating CAR is essential for financial institutions to comply with regulatory requirements and maintain sound financial health.