Regulatory capital refers to the mandatory capital reserves that financial institutions must hold, as stipulated by financial regulators, to ensure stability and reduce the risk of insolvency. This capital acts as a buffer against financial shocks, protecting depositors and maintaining confidence in the financial system.

Regulatory Capital

Regulatory capital

mandatory capital reserves

Financial institutions are organizations that facilitate the flow of capital and provide financial services to individuals, businesses, and governments, playing a crucial role in the economic stability and growth of a nation. They encompass a wide range of entities, including banks, credit unions, insurance companies, and investment firms, each serving distinct functions within the financial system.

financial institutions

financial regulators

Stability refers to the ability of a system or entity to maintain its state or return to it after a disturbance, ensuring continuity and predictability over time. It is a fundamental characteristic sought in various fields such as physics, economics, and social sciences, where it implies resilience and equilibrium.

stability

risk of insolvency

A capital buffer is an additional layer of capital that financial institutions are required to hold, above the minimum regulatory capital requirements, to absorb losses during periods of financial stress. It serves as a safeguard to ensure the stability of the financial system by preventing banks from becoming insolvent and requiring government bailouts.

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