The CAR is calculated by dividing the sum of Tier 1 and Tier 2 capital by the Risk-Weighted Assets (RWA). In this case, the bank's Tier 1 capital is $150 million, Tier 2 capital is $50 million, and the RWA is $1.5 billion. The calculation is as follows:

$$\text{CAR} = \frac{\text{Capital}}{\text{Risk weighted Assets}} = \frac{150 + 50}{1500} = 0.1333$$

Thus, the bank's CAR is 13.33%. Basel II requires banks to maintain a minimum CAR of 8%. Therefore, with a CAR of 13.33%, the bank not only meets but exceeds the minimum requirement.

Things to Remember

• The CAR calculation is a fundamental tool for banks to assess their ability to withstand financial stress and is a key indicator of financial health and stability.
• Basel II and subsequent accords focus on enhancing the risk sensitivity of the capital framework, emphasizing the importance of maintaining sufficient capital buffers.
• Banks are encouraged to maintain a CAR above the minimum requirement to ensure a buffer against potential financial uncertainties and market fluctuations.