With reference to 'Capital Adequacy Ratio' (CAR) under Basel III banking guidelines, which of the following statements is correct?

Answer and explanation

Correct answer: A. It measures a bank's capital to its risk-weighted credit exposure

  1. Step 1: CAR is calculated as (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets.
  2. Step 2: It is a regulatory metric enforced by the central bank (RBI) to prevent bank insolvency.
  3. Step 3: Tier 2 capital is explicitly included in the total regulatory capital numerator.

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