The capital adequacy ratio (CAR) gauges a bank's level of capital retention in relation to its level of risk. The CAR of banks must be monitored by national regulators in order to ascertain how well it can withstand an acceptable amount of loss.

The components of capital adequacy are-

The Capital Adequacy Ratio (CAR) aims to ensure that banks have an adequate amount of capital to safeguard depositors' funds.
(Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets is the calculation for CAR.
The BIS's capital standards have tightened up in recent years.
By reducing the likelihood of bank insolvency, capital adequacy ratios promote the effectiveness and stability of a country's financial system.
A bank with a high capital adequacy ratio is typically thought to be secure and likely to fulfill its financial obligations.

The principle of capital adequacy are-

High-quality and loss-absorbing capital are both necessary.
The Basel III criteria for common stock, along with supplementary tier 1 and tier 2 capital, are applied to establish the quality of capital, with retained earnings being the most important factor.

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