The Capital Adequacy Ratio (CAR) is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures. CAR is used by banking regulators to determine if banks have enough capital to cover potential losses on their loans. A high CAR indicates that the bank has more than enough capital to cover its losses and is therefore considered safe and sound. A low CAR, on the other hand, may indicate that the bank is not adequately funded and may be at risk for failure.Banking regulators use the Basel III framework to set minimum requirements for banks' CARs. The Basel III framework requires all banks to maintain a minimum CAR of 7%. This means that each bank must have at least 7 cents in available capital for every dollar in risk-weighted credit exposures. Banks that do not meet this requirement are subject to regulatory penalties, including higher reserve requirements and restrictions on their ability to make new loans.Most developed countries have implemented Basel III, but there are some exceptions. The United States has not yet fully adopted Basel III, so its minimum CAR requirement is lower than in other countries (at 5%). This means that U .S .banks are allowed more risky lending practices than banks in other countries . Some people argue that this puts U .S .banks at greater risk of failure in case of an economic downturn , while others argue that it allows U S businesses to under stand and borrow money more cheaply than those in other countries.
