Minimum capital requirements are an important part of the prudential regulatory framework.
They were first introduced in the Basel II Accords of the Bank for International Settlements in 2004 and have since grown in importance. The requirements set out how much capital a bank must hold to cover potential losses from different risk categories, including credit risk, market risk and operational risk.
The minimum capital requirements are referred to as Pillar 1 of the Basel II framework, while Pillars 2 and 3 cover prudential supervision and market discipline. The purpose of the minimum capital requirements is to ensure that a bank has sufficient capital to bear risks and absorb financial shocks. If a bank does not have sufficient capital to absorb losses, this can lead to insolvency and other serious economic consequences.
The exact minimum capital requirements differ depending on the risk profile and size of the bank. A higher risk appetite or a larger balance sheet usually require higher capital. Some countries also have national requirements that may go beyond the international standards.
Overall, minimum capital requirements are an important part of the financial system because they help ensure that banks can operate safely and stably. They ensure that banks have sufficient capital to absorb losses, which helps to strengthen investor confidence and financial stability.
