Capital requirement

Capital requirements (or capital adequacy requirements) refer to the set of rules and guidance that banks must observe in most current bank prudential frameworks as exist in individual jurisdictions. They form a central component of bank regulation and supervision.

Since the 1980s, capital requirements have typically been expressed as ratios of capital to assets, including a so-called solvency ratio or capital adequacy ratio in which the assets on the denominator are weighted by risk coefficients ("risk-weighted"), and a leverage ratio in which they are not. The definition of the numerator is sometimes referred to as regulatory capital or capital base, and has varied over time to address regulatory arbitrage. The denominator typically include not only assets as they appear in the bank's balance sheet, but also some off-balance-sheet items that may add to banking risk. Capital requirements are enforced by the relevant bank supervisor.

Capital requirements are separate from reserve requirements or liquidity requirements, which typically determine how much a bank must hold in cash or highly liquid assets.