Capital Adequacy Ratio (CAR) might sound like banking jargon, but it’s a powerful metric that underpins the stability of Australia’s financial system. Whether you’re a business owner seeking a loan, an investor evaluating banks, or a regular saver, understanding CAR is more relevant in 2025 than ever before.
What Is the Capital Adequacy Ratio?
At its core, CAR measures a bank’s available capital as a percentage of its risk-weighted assets. Put simply, it’s a safeguard: the higher the ratio, the more resilient the bank is to shocks or losses. The Australian Prudential Regulation Authority (APRA) sets minimum CAR requirements for all locally incorporated banks, ensuring they can absorb unexpected losses and protect depositors.
- Tier 1 capital: Core capital, including equity and disclosed reserves.
- Tier 2 capital: Supplementary capital, like subordinated debt and hybrid instruments.
CAR is calculated as: (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets.
CAR Policy Updates for 2025: What’s Changed?
Australian banks have long been considered among the world’s safest, but 2025 brings notable updates to capital adequacy standards:
- APRA’s ‘Unquestionably Strong’ Benchmarks: From January 2025, major banks must maintain a Common Equity Tier 1 (CET1) ratio of at least 11.5%—up from the previous 10.5%—to further bolster stability and market confidence.
- Climate Risk Add-ons: APRA now requires banks to assess and hold additional capital against climate-related credit risks, reflecting the growing exposure to extreme weather and transition risks in lending portfolios.
- Small Bank Relief: Regional and mutual banks benefit from streamlined reporting if they maintain a CET1 above 13%, encouraging competition without compromising safety.
These shifts are a direct response to global economic uncertainty, rising household debt, and the need for a resilient financial system amid climate and cyber threats.
Why CAR Matters for Borrowers, Businesses, and Investors
CAR isn’t just a number for regulators—it shapes the products, rates, and risk appetite of every Australian bank. Here’s how:
- For Borrowers: Higher capital requirements may mean stricter lending standards or slightly higher interest rates as banks balance risk and return. However, it also means your deposits are safer and the risk of bank failures is lower.
- For Business Owners: Businesses with higher risk profiles (like commercial property developers or startups) may face more scrutiny or need to provide more security to access funding. On the flip side, banks with robust CARs can lend confidently even during economic downturns.
- For Investors: A strong CAR signals prudent management and resilience—key factors for anyone investing in bank shares or hybrids. APRA’s new climate risk rules may also influence which sectors banks favour in their lending portfolios.
Real-world example: In 2024, when several regional banks in the US faced liquidity crises, Australia’s major banks remained steady. Analysts credited APRA’s tough capital rules—now even stricter in 2025—for cushioning local banks from global contagion.
Looking Ahead: The Future of CAR in Australia
As the financial landscape evolves, expect further fine-tuning of capital rules. APRA is already consulting on dynamic buffers that adjust based on economic conditions, and international Basel III ‘Endgame’ reforms may see further tweaks by late 2025 or 2026.
For consumers and businesses, the upshot is clear: strong CARs mean a safer, more stable banking sector, even if it sometimes feels a little harder to get a loan approved. In the end, that’s a trade-off most Australians can live with.
