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. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  2. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Mutual Funds & ETFs

    5 Mutual Funds that Hold Berkshire Hathaway Stock

    Discover the top five mutual funds most heavily weighted with Berkshire Hathaway stock, and the percentage of their assets dedicated to BRK.
  6. Mutual Funds & ETFs

    3 Mutual Funds that Hold Google Stock

    Discover the top three mutual funds that dedicate the largest percentage of their total assets to Google, Inc. stock.
  7. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  8. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  9. Mutual Funds & ETFs

    4 Mutual Funds that Hold Tesla Stock

    Obtain information on the four mutual funds that have significant allocations to Tesla Motors, Inc. in their major portfolio holdings.
  10. Mutual Funds & ETFs

    4 Mutual Funds that Hold Apple Stock

    Discover mutual funds offering the most substantial percentage of holdings in Apple, Inc. stock that investors can use to get significant exposure to Apple.
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. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

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

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

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