The Capital Adequacy Ratio (CAR) measures a bank's total capital (Tier 1 + Tier 2) as a percentage of its risk-weighted assets. Under Basel III, a minimum CAR of 8% is required globally; U.S. 'well-capitalized' banks must maintain 10%+. CAR directly governs how much credit a bank can extend.
CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets. Regulators set minimum CAR thresholds to ensure banks can absorb losses without threatening depositors or the broader financial system. ## Basel III Minimums The Basel Committee on Banking Supervision establishes international capital standards adopted in the U.S. through 12 CFR Part 217. Required minimums: Tier 1 ≥ 6% of RWA; Total Capital (CAR) ≥ 8% of RWA; plus a 2.5% Capital Conservation Buffer, making the effective floor 10.5% for most banks. U.S. banks must also satisfy a minimum 4% Tier 1 leverage ratio regardless of RWA. ## Well-Capitalized vs. Adequately Capitalized The FDIC's prompt corrective action framework classifies banks as well-capitalized (Tier 1 ≥ 8%, Total Capital ≥ 10%), adequately capitalized (Tier 1 ≥ 6%, Total Capital ≥ 8%), or undercapitalized. Banks below the well-capitalized threshold face enhanced supervisory scrutiny, restrictions on dividends, and higher deposit-insurance premiums. ## SMB Lending Implications A bank with a tight CAR has less room to originate new loans without raising fresh capital. Unguaranteed SMB loans carry 100% risk weights, consuming the most capital per dollar lent. When bank CARs compress — during credit cycles or losses — SMB lending is typically the first to tighten. SBA-guaranteed loans (0% RWA on the guaranteed portion) are capital-efficient exceptions.
U.S. banks must maintain a minimum Total Capital (CAR) of 8% of risk-weighted assets under Basel III (12 CFR Part 217). To be classified as 'well-capitalized' by the FDIC — the threshold that avoids enhanced regulatory action and higher insurance premiums — Total Capital must be at least 10% of RWA.
A bank with a constrained CAR near minimum thresholds will tighten credit standards, reduce approval rates, and increase pricing on high-RWA loans (including SMB commercial lending) to preserve capital. Checking your bank's public CAR in FDIC call reports can explain sudden credit tightening that seems unrelated to your own financials.
No. The Tier 1 capital ratio uses only Tier 1 capital (common equity + retained earnings) in the numerator. CAR uses Tier 1 + Tier 2 capital (which includes subordinated debt and hybrid instruments). CAR is always ≥ the Tier 1 ratio. Both are regulatory benchmarks; Tier 1 is the stricter, more important measure.