Regulatory Capital
The minimum amount of capital banks must hold under Basel III rules to absorb losses and protect depositors and the financial system.
What is Regulatory Capital?
Regulatory capital refers to the minimum amount of capital that banks and other regulated financial institutions must maintain under rules set by banking supervisors—primarily the Basel III framework developed by the Bank for International Settlements (BIS). Regulatory capital is divided into tiers: Tier 1 capital (core capital, primarily common equity and retained earnings) and Tier 2 capital (supplementary capital including subordinated debt and general loan loss reserves). Banks must meet minimum capital ratios—including the Common Equity Tier 1 (CET1) ratio, the Tier 1 capital ratio, and the Total Capital ratio—calculated as a percentage of risk-weighted assets. Regulatory capital requirements are designed to ensure banks can absorb unexpected losses without threatening depositors or requiring government bailouts.
Example
Under Basel III, U.S. banks must maintain a minimum CET1 ratio of 4.5% of risk-weighted assets, plus a capital conservation buffer of 2.5%—for an effective minimum of 7%. A bank with $100 billion in risk-weighted assets must hold at least $7 billion in Common Equity Tier 1 capital. G-SIBs (systemically important banks) face additional surcharges of 1–3.5%, requiring CET1 ratios of 8–10.5%.