Consider the following statements : 1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues. 2. CAR is decided by each individual bank. Which of the statements given above is/are correct ?

Statement 1 is correct because Capital Adequacy Ratio (CAR) acts as a financial cushion, ensuring that banks maintain a minimum percentage of their own capital to absorb potential losses arising from credit defaults. Statement 2 is incorrect because CAR is not decided by individual banks; it is a regulatory requirement mandated by the Central Bank (RBI in India) based on international Basel Norms to ensure systemic stability. The core concept being tested is the regulatory framework for banking solvency and the implementation of Basel Accords.