Capital adequacy is calculated as?

• A. The ratio of CET1 capital to risk-weighted assets
• B. The ratio of total liabilities to total assets
• C. The ratio of non-performing loans to total loans
• D. Capital adequacy is CET1 capital (and total capital) divided by risk-weighted assets

Answer: (D)

Capital adequacy measures how much a bank can absorb losses relative to the riskiness of its assets. The riskiness is captured by risk-weighted assets, which adjust asset values by their credit, market, and operational risk. The capital base used in this measure can be the strongest form of capital (CET1) or the broader regulatory capital (which includes Tier 1 and Tier 2). By dividing that capital amount by risk-weighted assets, you get a ratio that shows whether the bank holds enough cushion against potential losses given the risks it takes. This is why the correct formulation is that capital adequacy equals CET1 capital (and total capital) divided by risk-weighted assets. The other options describe different metrics: one focuses only on CET1 relative to risk-weighted assets, another is a leverage-like ratio of liabilities to assets, and another is an asset-quality measure of non-performing loans to total loans.