Background to the Study
Capital Adequacy Ratio (CAR) is one of the fundamental measures of the strength and wellness of banks the world over. The term is an important measure of ―safety and soundness‖ for banks and depository institutions because it serves as a buffer or cushion for absorbing losses (Abba, Peter, & Inyang, 2013). Capital Adequacy is the first letter ‗C‘, in the popular acronym ‗CAMELS‘ in banking parlance. The importance of the concept has drawn the attention of financial experts and policy makers both locally and internationally, especially Central Banks, Federal Reserves, Deposit money banks, Insurance Companies and the World Bank and has led to the popular Basel Accords. The Basel Capital Accord is an international standard for the calculation of capital adequacy ratios. The Accord recommends minimum capital adequacy ratios that banks should meet. Applying minimum capital adequacy ratios serves to promote the stability and efficiency of the financial system by reducing the likelihood of banks becoming insolvent. When a bank becomes insolvent, this may lead to loss of confidence in the financial system, causing financial problems for other banks and perhaps threatening the smooth functioning of financial markets.
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