capital adequacy ratio (CAR)

CAR is calculated as a ratio of a bank’s capital base to its risk-weighted assets.  The ratio is intended to be a measurement of a bank’s capital position in respect of its exposures to credit risk, market risk and operational risk.  The Banking Ordinance stipulates that locally incorporated authorized institutions must maintain a minimum CAR of 8%, but the Monetary Authority may under section 101 of the Ordinance increase the minimum ratio to not more than 16%.  Each locally incorporated authorized institution is assigned a minimum ratio on an unconsolidated (solo) basis or on both a consolidated and unconsolidated basis within the range specified by the Ordinance.

The method based on which a locally incorporated authorized institution should calculate its CAR is set out in detail in the Banking (Capital) Rules made by the MA under section 98A of the Ordinance.  The standards set out in the Rules are in line with the International Convergence of Capital Measurement and Capital Standards released by the Basel Committee (commonly referred to as “Basel II”) in June 2006.

Consolidated basis: In the calculation of the consolidated CAR, the consolidated position of the institution covers its local and overseas branches and the subsidiaries specified by the HKMA.

Solo basis: In the calculation of the solo CAR, the combined position of the institution's local and overseas branches is covered.