Part I The Elements of Bank Financial Supervision, 5 Bank Capital Requirements

Subject(s):

Financial regulation — Capital adequacy — Leverage — Basel committee on Banking Supervision

This chapter begins by discussing the three overlapping capital requirements that banks are subject to. The first is the orthodox Basel capital requirement. The second is the Leverage Ratio, which is simply a non-risk-weighted capital requirement. The third is the stress test requirement. This has historically been the largest of the three. Stress testing identifies a particular probable state of the world, estimates the total loss which would occur if that state of the world were to eventuate, and requires capital sufficient to ensure that the bank retains sufficient capital after suffering the projected losses. The remainder of the chapter covers Pillar 2 assessment, capital floor, and capital buffers.