Question

UPSC Prelims 2018 Question:

Consider the following statements

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.

CAR is decided by each individual bank.

Which of the statements given above is/are correct?

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

Answer (Detailed Solution Below)

Option 1: 1 only

Detailed Solution

Explanation:

Capital Adequacy Ratio (CAR) is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. .
It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process. So, statement 1 is correct and statement 2 is not correct.

Therefore, option (1) is the correct answer.

Subject: Economics | Money and Banking

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