Regulatory Capital
Regulatory capital is the minimum amount of capital a bank must hold as required by financial supervisors.
Meaning in Practice
Regulatory capital is defined by international standards such as Basel III and includes Tier 1 and Tier 2 capital components. It is calculated relative to risk-weighted assets. Supervisory authorities monitor compliance to ensure financial soundness.
Why It Matters
Regulatory capital safeguards the banking system against systemic crises. It ensures that banks can absorb losses without threatening depositors or financial stability. Strong regulatory frameworks enhance credibility and investor confidence.
Market Impact
Changes in capital rules can influence bank profitability and lending behavior. Higher requirements may reduce leverage but strengthen resilience. Market participants closely monitor capital ratios as indicators of bank health.
Example
A regulator requires banks to maintain a minimum CET1 ratio of 4.5 percent plus additional buffers to absorb potential losses.