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Banks follow well-defined rules for capital adequacy and loan loss provisioning to ensure financial stability, protect depositors, and maintain confidence in the banking system. These rules are framed by international standards, mainly issued by the Basel Committee on Banking Supervision, and are implemented by national regulators with suitable adjustments. In simple terms, capital adequacy rules ensure that a bank has enough of its own funds to absorb losses, while loan loss provisioning rules ensure that banks recognize potential losses from loans in advance rather than suddenly in a crisis. Capital adequacy refers to the minimum amount of capital a bank must hold in relation to the risks it takes. Capital acts as a cushion that absorbs unexpected losses and prevents the bank from becoming insolvent. Under international banking management, the Basel I, Basel II, and Basel III frameworks define how capital adequacy is measured and maintained. The most widely used measure is the Capital Adequacy Ratio (CAR), which is calculated as a bank’s capital divided by its risk-weighted assets. Risk-weighted assets are loans and investments adjusted according to their riskiness; for example, a loan to a government may carry lower risk weight than a loan to a private company. Bank capital is divided into different tiers based on quality and ability to absorb losses. Tier 1 capital is the core ________ _____ _______ ____ __________.
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