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A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets.
This is known as the internal ratings-based (IRB) approach to capital requirements for credit risk. Only banks meeting certain minimum conditions, disclosure requirements and approval from their national supervisor are allowed to use this approach in estimating capital for various exposures. [1] [2]
Basel III requires banks to have a minimum CET1 ratio (Common Tier 1 capital divided by risk-weighted assets (RWAs)) at all times of: . 4.5%; Plus: A mandatory "capital conservation buffer" or "stress capital buffer requirement", equivalent to at least 2.5% of risk-weighted assets, but could be higher based on results from stress tests, as determined by national regulators.
The standards set new definitions of capital, higher capital ratio requirements, and a leverage ratio requirement as a "back stop" measure. Risk-based capital requirements (RWAs) for CVA risk and interest rate risk in the banking book were introduced for the first time, along with a large exposures framework, a revised securitisation framework ...
According to the study, capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks' focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III, may further contribute to these skewed incentives.
The Basel II accord proposes to permit banks a choice between two broad methodologies for calculating their capital requirements for credit risk. The other alternative is based on internal ratings. Reforms to the standardised approach to credit risk are due to be introduced under the Basel III: Finalising post-crisis reforms.
The requirements are based on an international set of capital requirements known as Basel III imposed in the decade following the 2008 financial crisis. ... She wanted the Fed to tailor capital ...
Under the Standardised Approach, [12] the mimimum capital requirement [13] is the sum of three components: (i) Sensitivities-based capital, for seven risk classes, which reflects linear risks via their delta and vega (for options) risk factors, and non-linear risks via curvature. A capital charge is calculated here for three correlation ...