regulatory capital

Written By: Ehsan Jahandarpour

Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the assets side of a firm’s balance sheet. They should not be confused with reserve requirements, which govern the liabilities side of a bank’s balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets.