Capital Charges

Capital charges are the amount of capital financial institutions are required to hold to cover potential risks, ensuring they can absorb losses without jeopardizing stability. These charges act as a financial cushion, promoting responsible lending and safeguarding the broader economy. Regulatory bodies set minimum capital requirements based on the types and sizes of risks—such as credit, market, or operational risks—that a bank or financial firm faces. Essentially, capital charges ensure that institutions maintain enough resources to remain solvent during adverse situations, balancing profitability with stability.