Prudential Standards
Prudential standards are regulatory requirements that ensure financial institutions maintain adequate capital, liquidity, and risk controls.
Meaning in Practice
In practice, prudential standards define minimum capital ratios, liquidity buffers, and governance requirements. They are enforced by supervisory authorities to promote safe and sound operations. Institutions must regularly report compliance and adjust risk exposures accordingly.
Why It Matters
Prudential standards reduce the probability of bank failures and systemic crises. They promote resilience against economic shocks and financial volatility. Strong standards underpin long-term financial stability.
Market Impact
Stricter prudential rules may constrain lending and profitability in the short term. However, they enhance investor confidence and reduce systemic risk premiums. Markets respond to changes in standards through adjustments in bank valuations and funding costs.
Example
A regulator raises minimum capital ratios, requiring banks to retain more earnings or issue new equity to meet updated prudential standards.