Consider the following statements: 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

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Q: 61 (IAS/2018)
Consider the following statements:
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?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,124,44,124,10,26,8

keywords: 

{'capital adequacy ratio': [0, 0, 0, 1], 'individual bank': [0, 0, 0, 1], 'banks': [5, 6, 5, 25], 'car': [0, 2, 12, 17], 'own funds': [0, 0, 0, 1], 'holders': [0, 0, 0, 2]}

The correct answer is `1 only`. The first statement is correct as the Capital Adequacy Ratio (CAR) is indeed a measure that banks use to ensure that they can absorb a reasonable amount of loss. It is calculated by dividing a bank`s capital by its risk-weighted assets. This capital consists of a bank`s own funds, and is used to cover potential losses that could occur as a result of borrowers defaulting on their loans.

The second statement, however, is incorrect. CAR is not determined by each individual bank, but by banking regulations in the country. For instance, in India, it is the Reserve Bank of India that determines the CAR as a part of its regulatory responsibilities. Each bank does not have the freedom to set their own individual CAR, because it is a key measure of a bank`s financial strength that is used by regulatory bodies to ensure the stability of the financial system. Hence, only statement 1 is correct.