Risk-Based Capital Requirement

AAA

DEFINITION of 'Risk-Based Capital Requirement'

A rule that establishes minimum required liquid reserves for financial institutions. Risk-based capital requirements exist to protect the firms, their investors and customers and the economy as a whole. Placement of risk-based capital requirements ensure that each financial institution has enough capital to sustain operating losses while maintaining a safe and efficient market. In June 2011, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System and the FDIC adopted a rule that enforces a permanent floor for risk-based capital requirements. The rule also provides some flexibility in risk calculation for certain low-risk assets.


Also known as regulatory capital.

VIDEO

Loading the player...

BREAKING DOWN 'Risk-Based Capital Requirement'

The Collins Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as "Dodd-Frank") imposes minimum risk-based capital requirements for insured depository institutions, depository institution holding firms and nonbank financial companies that are supervised by the Federal Reserve. Under the rules, each bank is required to have a total risk-based capital ratio of 8% and a tier 1 risk-based capital ratio of 4%.

The Basel Committee on Banking Supervision, which operates through the Bank for International Settlements, publishes the Basel Accords – the structure by which banks and depository institutions calculate capital. Basel I was introduced in 1988, followed by Basel II in 2004. Basel III was developed in response to deficits in financial regulation that appeared in the late 2000s financial crisis.

RELATED TERMS
  1. Central Guarantee Fund

    A fund set aside by state insurance regulators to pay out claims ...
  2. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  3. Securities And Exchange Commission ...

    A government commission created by Congress to regulate the securities ...
  4. Liquidity Cushion

    A reserve fund for a company or individual made up of highly ...
  5. Liquidity

    1. The degree to which an asset or security can be bought or ...
  6. Insolvency

    When an individual or organization can no longer meet its financial ...
Related Articles
  1. Investing Basics

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  2. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  3. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI KLD 400 Social

    Find out about the iShares MSCI KLD 400 Social exchange-traded fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Agency Bond

    Find out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares DWA SmallCap Momentum

    Find out about the PowerShares DWA SmallCap Momentum Portfolio ETF, and explore detailed analysis the fund's characteristics, suitability and recommendations.
RELATED FAQS
  1. What level of reserve ratios is typical for an insurance company to protect against ...

    In the United States, and most developed nations, regulators impose required statutory capital reserve ratios on insurance ... Read Full Answer >>
  2. What is the Federal Reserve Board's market risk capital rule?

    The Federal Reserve Board’s market risk capital rule, or MRR, sets forth the capital requirements for banking organizations ... Read Full Answer >>
  3. What is the haircut rate imposed by clearing corporations?

    A haircut rate is a measure that reduces the value of any collateral used in a loan to ensure that when the effects of volatility ... Read Full Answer >>
  4. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  2. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  4. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  5. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  6. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!