Capital requirements
Also called: Basel III, capital ratio, Tier 1 capital
Capital requirements are rules that make banks fund part of their lending with their own money (equity) so they can absorb losses without failing. Under the Basel rules the minimum is 8% of risk-weighted assets.
Equity is the cushion between a bank's losses and its depositors. The thinner the cushion, the higher the bank's return on equity in good times and the faster it fails in bad times.
In Journey Shares
The game's bank must keep equity of at least 8% of its loans, under the Basel rules. →
Related terms
- Fractional reserve banking: Fractional reserve banking is the system in which banks keep only part of their deposits as cash reserves and lend out the rest, which creates new money in the economy.
- Bank run: A bank run happens when many depositors withdraw their money at once because they fear the bank will fail, which can make it fail even if it was sound.
- Bailout: A bailout is when a government or central bank gives money to a failing company or bank to keep it from collapsing, usually because its failure would hurt the wider economy.
- Leverage: Leverage is using borrowed money to increase the size of an investment, which magnifies both gains and losses.
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