Capital adequacy ratio refers to the ratio of capital to total assets of commercial banks. The capital composition of banks should be divided into core capital and secondary capital. The core capital includes the bank's share capital and the public reserve drawn from the after-tax retained profits. According to the Basel Accord, there should be a certain proportion between the two parts, that is, the core capital should account for more than 50% of the total bank capital. Core capital includes paid-in capital, capital reserve, surplus reserve fund and undistributed profit, and secondary capital refers to loan reserve. When calculating the total capital, the core capital and secondary capital of commercial banks should be subtracted from the following parts.

As we all know, banks operate by "borrowing" high debts from special enterprises from the public, but they do not have their own funds and their ability to resist risks is not strong. However, in order to guard against bank risks, the government regulatory authorities have put forward capital ratio requirements for banks of different sizes, especially for all domestic banking institutions, in accordance with the requirements of the international Basel Accord. Bank capital mainly includes core capital and secondary capital. Core capital refers to paid-in capital, capital reserve, surplus reserve and undistributed profit. Tier 2 capital refers to loans such as bad debt reserve, bad debt reserve, investment risk reserve and long-term bonds with more than 5 years.

In the past 20 years, both large state-owned commercial banks, large joint-stock commercial banks and local small and medium-sized banking institutions have met the capital ratio requirements. However, in recent years, with the development of the real economy, the weakness of the international economic situation and the influence of trade frictions, as well as the wait-and-see attitude of banking institutions towards non-standard business, the capital ratio of China banking institutions has declined, especially small and medium-sized banking institutions, because the governance mechanism has not really been established and their internal control ability is not strong. As a result, non-performing loans rebounded, operating profit margins declined, and provision coverage ratio, capital adequacy ratio and loan provision ratio all declined to varying degrees.