Capital Requirement


DEFINITION of 'Capital Requirement'

The standardized requirements in place for banks and other depository institutions, which determines how much liquidity is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit Insurance Corporation or Federal Reserve Board. These requirements are put into place to ensure that these institutions are not participating or holding investments that increase the risk of default and that they have enough capital to sustain operating losses while still honoring withdrawals.

Also known as "regulatory capital".

BREAKING DOWN 'Capital Requirement'

In the United States, the capital requirement for banks is based on several factors, but is mainly focused on the weighted risk associated with each type of asset held by the bank. The capital requirements guidelines are used to create capital ratios, which can then be used to evaluate and compare lending institutions based on their relative safety.

An adequately capitalized institution, based on the Federal Deposit Insurance Act, must have a Tier 1 capital-to-risk weighted assets ratio of at least 4%. Institutions with a ratio below 4% are considered undercapitalized and those below 3% are significantly undercapitalized.

  1. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  2. Advanced Internal Rating-Based ...

    An approach that requests that all risk components be calculated ...
  3. Bank For International Settlements ...

    An international organization fostering the cooperation of central ...
  4. Tier 1 Capital

    A term used to describe the capital adequacy of a bank. Tier ...
  5. Capital Adequacy Ratio - CAR

    A measure of a bank's capital. It is expressed as a percentage ...
  6. Tier 2 Capital

    One of two categories by which a bank's capital is divided. Tier ...
Related Articles
  1. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  2. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  3. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  4. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  5. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  6. Entrepreneurship

    Creating a Risk Management Plan for Your Small Business

    Learn how a complete risk management plan can minimize or eliminate your financial exposure through insurance and prevention solutions.
  7. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  8. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  9. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Mutual Funds for Retirement

    Discover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
  1. How much of the asset management industry has moved from traditional managers to ...

    While the exact numbers are difficult to calculate due to variations in measurement and the overall growth of the asset management ... Read Full Answer >>
  2. What are key government regulations that affect investing in the banking sector?

    In the aftermath of the global financial crisis of 2008, the banking sector in the United States became subject to a number ... Read Full Answer >>
  3. How does a credit crunch occur?

    A credit crunch occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to ... Read Full Answer >>
  4. Are 401ks FDIC insured?

    The Federal Deposit Insurance Corporation (FDIC) works as a protector for customers when banks and financial institutions ... Read Full Answer >>
  5. Does the FDIC cover identity theft?

    When a third party gains access to your bank account and conducts transactions without your consent, the FDIC does not have ... Read Full Answer >>
  6. Does the FDIC cover credit unions?

    The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. The FDIC only insures deposits in banks and ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center