[Solved] What is the primary purpose of maintaining the Capital Adequacy Ratio (CAR) by banks? — Ans: To ensure banks have sufficient capital to absorb potential losses | Financial Awareness

Financial Awareness - Risk, Stability & Emerging Finance

What is the primary purpose of maintaining the Capital Adequacy Ratio (CAR) by banks?

ATo regulate the interest rates offered by banks

BTo ensure banks have sufficient capital to absorb potential losses

CTo determine the maximum loan amount a bank can give

DTo calculate the total deposits held by the bank

Step-by-Step Solution

Step 1: Understand the concept of CAR
CAR is a regulatory measure to ensure banks maintain enough capital to cover risks and absorb losses.
Step 2: Analyze options
Only the option about absorbing potential losses aligns with the purpose of CAR; others relate to different banking functions.
Final Answer:
To ensure banks have sufficient capital to absorb potential losses → Option B
Quick Check:
Purpose of CAR = absorb potential losses ✅

Quick Trick: Remember CAR protects depositors by ensuring bank stability

Common Mistakes:

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