Consider the following statements: 1) Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account holders fail to repay dues. 2) CAR is decided by each individual bank. [2018]

Consider the following statements:

Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account holders fail to repay dues.
CAR is decided by each individual bank.

Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities. It is a financial metric used to gauge a bank’s ability to withstand losses without affecting its lenders and depositors. While there are various capital adequacy ratios, one can be calculated simply by dividing a bank’s capital by its assets. In the event of heavy losses, the bank’s capital takes the first hit before lenders’ funds are affected.
As banks are institutions that are run mainly through borrowings, even minor losses can completely wash out their capital. So, the capital adequacy ratio, the most widely used measure of bank strength, is closely monitored by both lenders and regulators.

CAR is not decided by each individual bank. Instead, it is regulated and standardised by financial authorities such as central banks (RBI in India) or regulatory bodies in order to ensure the stability of the banking system. CAR minimums are 8.0% under Basel II and 10.5% (with an added 2.5% conservation buffer) under Basel III. The higher the CAR, the better able a bank should be to meet its financial obligations when under stress.