Question 16
1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
2. CAR is decided by each individual bank.
Which of the statements given above is/are correct?
AOptions
BSolution
Statement 1 is correct: Capital Adequacy Ratio (CAR), also known as Capital to Risk-weighted Assets Ratio (CRAR), is a measure of a bank's financial strength, expressed as a ratio of its capital to its risk-weighted assets. It represents the amount of capital a bank must hold to absorb potential losses from its operations. This ensures that banks have sufficient cushion to protect depositors and promote stability in the financial system.
Statement 2 is incorrect: CAR is not decided by each individual bank. It is mandated by banking regulators, such as the Reserve Bank of India (RBI) in India, and international standards-setting bodies like the Basel Committee on Banking Supervision (BCBS). These regulatory bodies set minimum CAR requirements that all banks under their jurisdiction must adhere to, to ensure systemic financial stability.
CStrategy
For financial concepts, understand both the definition and the regulatory context. Differentiate between internal bank decisions and external regulatory requirements. Absolute statements like 'decided by each individual bank' should be scrutinized carefully, especially in highly regulated sectors like banking.
DSyllabus Analysis
This question falls under the Indian Economy, specifically Banking and Financial Markets, and Financial Regulations.
EQuestion Analysis
Medium. It requires a clear understanding of a core banking regulatory concept and distinguishing between bank autonomy and regulatory mandates.