If a Central Bank increases the Capital Adequacy Ratio CAR significantly........

Economic Affairs Types of Banks and Banking

Download Solution PDF

If a Central Bank increases the Capital Adequacy Ratio (CAR) significantly

It is encouraging banks to take greater risks with their investments.

It mandates banks to keep a very low amount of interest rates on their deposits.

It signals near zero policy rates to encourage lending by banks.

It means that the banks are required to keep relatively more capital with them for the investments they make

छोटे Courses बड़े Results

Master Types of Banks and Banking

Prepare through Micro-courses

Try Now

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.
• The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%.
Option A and D: Higher the CAR, higher the amount of capital that banks are needed to keep with them. This discourages risky lending and increases the capital with banks per quantum of investment. So, A is wrong and D is correct.