Bank Capital Ratio Requirements. The Capital Adequacy Ratio set standards for banks by looking at a bank's ability to pay liabilities, and respond to credit risks and operational risks. Higher bank capital contributes to financial stability.
The capital adequacy ratio is important from the point of view of solvency of the banks and their protection from untoward events which arise as a result of liquidity risk as well Theoretically, reserve requirements are supposed to limit the amount of money that can be created by banking institutions. Regulators choose capital ratios to maximize expected domestic social welfare, which is a weighted average of bank prots and a measure of nancial stability. In this section we consider a single rm attempting to satisfy its risk-weighted capital ratio when subject to price impacts.
The Capital Adequacy Ratio set standards for banks by looking at a bank's ability to pay liabilities, and respond to credit risks and operational risks.
When banks increase capital, they have a bigger cushion to absorb losses during distress.
A bank that has a good CAR has enough capital to absorb potential losses. Capital requirements are set to ensure that banks and depository institutions' holdings are not dominated by investments that increase the risk of default. In this section we consider a single rm attempting to satisfy its risk-weighted capital ratio when subject to price impacts.