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What is Capital to Risky Asset Ratio (CRAR)?

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What is Capital to Risky Asset Ratio (CRAR)?
posted Aug 14, 2017 by Abu Anam

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One of the leading outcomes of the financial sector crisis of 2007 is that financial regulators or central banks are coming out with strict regulation of financial institutions. They found that the best way to ensure non failure of financial institutions including commercial banks is to put more capital into these institutions.

Thus, the central banks are instructing the banks to increase capital by the share holders. More the capital put by the shareholders or owners of banks, the more will be the capability of the banks to overcome a crisis on its own. Similarly, if the share holders are injecting more money, the bank will not take any risks, as it may result in more loss of money of the shareholders; in the case of a bank failure.

This means that a situation of government or the central bank coming for the rescue of a failing bank by giving fund to it doesn’t arise. In this way, capital enhancement became the core policy of many new financial sector regulation measures including Basel III.

answer Aug 19, 2017 by Reshmi S