Capital requirement

The capital requirement sets a framework on how banks and depository institutions must handle their capital in relation to their assets. Internationally, the Bank for International Settlements's Basel Committee on Banking Supervision influences each country's capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accords. The latest capital adequacy framework is commonly known as Basel II. Most developed countries do not adjust the capital adequacy ratios to their yearly inflation rates, therefore eroding their lending capacity, year after year. This has promoted the growth of Junk Bonds, hedge funds and private equity as prime lenders, without the customary lending standards. Banks have redirected their dying business to services, high yield consumer credit, derivatives, closing credit deparments and losing credit inteligence, now restricted to two firms, S&P and Moody´s. Loans are not evaluated in terms of the % Cs of credit, but only on underlying Assets and the credit rating.

In the United States, "depository institutions" are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB).