(a). State THREE objectives of the need for a weighted capital adequacy ratio (RWCAR) for banking...

(a). State THREE objectives of the need for a weighted capital adequacy ratio (RWCAR) for banking institutions.

Expert Solution

Three objective of need for weighted average capital adequacy ratio for the banking institution are as follows-

A. It will be helpful in finding out the solvency of the banks against risk of uncertainty and risk of loss of erosion in the asset value.

B. Failure of a bank can lead to contagian in the entire economy so weighted average capital adequacy ratio will always be trying to contain any kind of failures of the bank by appropriately regulating the maintenance of certain standard which will be apportioned according to the capital maintained by the bank so that there is no failure of the bank and there is no contagian.

C. Another objective of weighted capital adequacy ratio is shareholders of the bank will be aware about the risk they are taking while investing into the equity of the bank because it will be reflecting the financial soundness of the bank and exposure of the bank in respect of various assets and liability of the bank to deal with the financial shocks.

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