In order to calculate capital adequacy ratio, the banks are required to take into consideration, which of the following risks?

A. Credit risk

B. Market risk

C. Operational risk

Choose the most appropriate answer from the options given below:

Capital adequacy ratio (CAR) is the ratio of a bank's capital in relation to its risk-weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

CAR is measured as:

• CAR = [Tier 1 + Tier 2 + Tier 3 (Capital funds)] / Risk weighted assets.
• The risk-weighted assets take into consideration credit risk, market risk, operational risk.

Therefore, in order to calculate the capital adequacy ratio, the banks are required to take into consideration credit risk, market risk, operational risk.

Credit risk is a possibility of loss due to the borrower's failure to repay a loan or meet contractual obligations.

Market risk is a possibility of loss due to changes in the market sector.

Operational risk is a possibility of loss due to inadequate or failed internal processes, control, system, people, or external events. 

The Basel III norms stipulated a CAR of 8%. 

However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9%, and Indian public sector banks are required to maintain a CAR of 12%.