Capital Requirement(Banking) Law and Legal Definition
Capital requirement is the amount of money that a business needs for its normal operations. In banking institutions, capital requirement is the standardized requirement determining the quantity of liquidity required to be held for assets. Capital must be handled in relation to assets. Capital requirement ensures that:
- the bank does not holding investments increasing the risk of default; and
- the bank has got enough capital to sustain operating losses while honoring withdrawals.
Capital requirement is also known as regulatory capital. Usually banks handle its capital as per the terms and guidelines setup in the capital requirement. Capital requirement for banks in the U.S. is mainly based on the weighted risk associated with each type of asset held by a bank.