Capital Adequacy Ratio Calculator

Basel III requires a minimum total CAR of 8%, with at least 4.5% CET1 and 6% Tier 1 capital. Adding the mandatory 2.5% capital conservation buffer brings the effective minimum to 10.5%. Systemically important banks face additional surcharges of 1-3.5%.

Tier 1 (core capital) includes common equity and retained earnings — it absorbs losses while the bank continues operating. Tier 2 (supplementary capital) includes subordinated debt and hybrid instruments that absorb losses only in winding-up or liquidation. Tier 1 is considered higher quality because it is permanently available.

Risk-weighted assets assign risk weights to different asset categories reflecting their credit risk. Cash and government bonds carry 0-20% weight, residential mortgages 35-50%, and unsecured corporate loans 100%. Total RWA = sum of (asset value × risk weight) across all exposures.

CAR ensures banks can absorb unexpected losses from loan defaults, market declines, and operational failures without becoming insolvent. Higher CAR provides a larger cushion for depositors and the broader financial system. Banks with insufficient CAR face regulatory restrictions on lending, dividends, and growth.

Banks can raise CAR by issuing new common equity, retaining earnings instead of paying dividends, reducing risk-weighted assets (selling or securitizing risky loans), converting debt to equity, or shifting the portfolio toward lower-risk-weight assets like government bonds.

Common Equity Tier 1 (CET1) is the highest-quality form of regulatory capital, consisting of common shares, retained earnings, and accumulated other comprehensive income. It is the first line of defense against losses. Basel III requires a minimum CET1 ratio of 4.5%, but most well-capitalized banks maintain 10-14%.

Loan losses directly reduce Tier 1 capital through the income statement (provisions reduce retained earnings). A $100M write-off on a bank with $1B in Tier 1 capital and $10B RWA drops the Tier 1 ratio from 10% to 9%. The RWA may also change as the defaulted asset is written off.

The leverage ratio uses total assets (not risk-weighted) as the denominator: Tier 1 Capital ÷ Total Exposure. Basel III requires a minimum 3% leverage ratio. It serves as a backstop to CAR, preventing banks from gaming risk weights to appear well-capitalized while holding enormous total exposures.

Banks report CAR quarterly to their national regulator (e.g., Fed, PRA, APRA). Publicly listed banks also disclose capital ratios in their quarterly earnings releases. Regulators may require more frequent reporting during periods of financial stress.

Banks below the capital conservation buffer (10.5% total) face automatic restrictions on dividend payments, share buybacks, and discretionary bonus payments. Banks below absolute minimums (8% total, 6% Tier 1, 4.5% CET1) may face supervisory intervention, mandatory capital raising, or in extreme cases, resolution proceedings.

Basel III provides the global framework, but national regulators can (and do) impose stricter requirements. For example, Switzerland requires 14.3% for systemically important banks, India mandates 9% minimum CAR, and Australia requires 10.5%. Always check your jurisdiction's specific requirements.