Bank Capital Requirements

Overview

The primary functions of capital are to support a banking organization’s operations, to act as a cushion to absorb unanticipated losses and declines in asset values that otherwise could cause an institution to fail, and to provide protection to uninsured depositors and debt holders in the event of a liquidation. Capital regulation is particularly important because deposit insurance and other elements of the federal safety net provide banks with an incentive to increase their leverage beyond what the market would permit. The types and quantity of risk inherent in an institution’s activities will determine the extent to which it may be necessary to maintain capital at levels above the required regulatory minimums in order to properly reflect the potentially adverse consequences that these risks may have on the institution’s capital.

A banking organization’s regulatory capital condition always has had a role in supervision and regulation. However, since the 2008 financial crisis, a core focus of the federal banking agencies has been on higher and better-quality capital. The Dodd-Frank Act and the Basel III Accord, in particular, fundamentally have altered bank capital and liquidity requirements. As with many other aspects of banking regulation, bank capital and liquidity standards generally are applied with more stringency to firms of greater systemic importance.

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