Capital adequacy

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1.

Capital adequacy is the system of regulating banks (and other financial institutions) by requiring them to maintain minimum acceptable levels of capital, adequate to absorb their potential credit losses and other trading losses.


2.

The term 'capital adequacy' also refers to the prevailing minimum amount of risk weighted capital that banks are required to maintain in proportion to the risk assets that they assume, normally used in connection with the requirements laid down internationally by the Bank for International Settlements (BIS) and monitored by domestic central banks.

Historically, the BIS capital adequacy standard was 8%.

Under the Basel III framework this standard is increased (strengthened) substantially - very roughly doubled - and its measurement is refined.


See also