Why are banks subject to capital requirements?
Nearly all jurisdictions with active banking markets require banking organisations to maintain at least a minimum level of capital. Capital serves as a foundation for a bank’s future growth and as a cushion against its unexpected losses. Adequately capitalised banks that are well managed are better able to withstand losses and to provide credit to consumers and businesses alike throughout the business cycle, including during downturns. Adequate levels of capital thereby help to promote public confidence in the banking system. The technical challenge for both banks and supervisors has been to determine how much capital is necessary to serve as a sufficient buffer against unexpected losses. If capital levels are too low, banks may be unable to absorb high levels of losses. Excessively low levels of capital increase the risk of bank failures which, in turn, may put depositors’ funds at risk. If capital levels are too high, banks may not be able to make the most efficient use of their reso
