The capital ratio (also known as the capital adequacy ratio) measures a bank’s financial strength. It compares the amount of money a bank owns (its capital) to its risk-weighted assets.

Regulators require banks to maintain this ratio to ensure they can survive potential financial losses. The formula is:

• (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets

By keeping this ratio high, banks remain more stable during difficult economic times. However, holding too much capital can sometimes limit a bank’s ability to provide loans to customers.