capital adequacy rules

Capital adequacy rules are regulations that require banks and financial institutions to hold a sufficient amount of their own funds—known as capital—to cover potential losses. This ensures they can absorb shocks and continue operating during economic downturns, protecting depositors and the overall financial system. Essentially, these rules set minimum capital levels based on the riskiness of a bank’s assets, promoting stability and confidence by preventing excessive risk-taking that could lead to insolvency.