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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

RELATED TERMS
  1. Central Guarantee Fund

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

    When an individual or organization can no longer meet its financial ...
  3. Liquidity

    1. The degree to which an asset or security can be bought or ...
  4. Liquidity Cushion

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

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

    A government commission created by Congress to regulate the securities ...
Related Articles
  1. What is the haircut rate imposed by ...
    Trading Strategies

    What is the haircut rate imposed by ...

  2. Systematic Risk
    Investing

    Systematic Risk

  3. 7 Ways To Protect Against Credit Card ...
    Credit & Loans

    7 Ways To Protect Against Credit Card ...

  4. The Fear And Greed Cycle Lives On
    Markets

    The Fear And Greed Cycle Lives On

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center