Capital Requirements (Banking) - Explained
What are Capital Requirements?
Written by J. Mance Gordon
Updated at April 17th, 2022
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What are Capital Requirements?
The least amount of money that banks and depository institutions are required to maintain is referred to as capital requirement. This amount should never be claimed, should never be lent and should not be on debt. The reserved capital is meant to deal with unexpected losses. This amount is set by Federal Reserve Bank, Federal Deposit Insurance Corporation, State Banking Regulators and Bank for International Settlements.
Back to:BANKING, LENDING, & CREDIT INDUSTRY
How Do Capital Requirements Work?
Banks are required to maintain capital reserves to ensure that they have enough cash to handle unexpected losses while still honoring customers withdrawal requests. To set capital requirements for an institution, the concerned authorities consider the weighted risks linked with the investments and assets of the depository institution. Capital requirements are key in evaluating the security and financial strengths of lending institutions. For instance, a bank insured with FDIC is required to have a Tier-1 capital-to-risk ratio. Most banks are able to lend the maximum amount of funds and maintain the minimum capital requirement through the overnight lending program. After the financial crisis of 2008, regulatory agencies raised the minimum capital requirements for banks and creditors.