Question

why are capital requirements considered one of the more important kinds of regulatory efforts? What kind of capital standards have been employed?

Answer 1

Capital requirement are considered one of the major regulatory effort because Capital requirement will be helping the banks in order to survive through various kinds of adverse economic cycle and they will be guaranteeing the stability of the bank and stopping any kind of contagion in the financial market through proper maintenance of capital ratios.

Capital is the most important thing for operation in the long run and it will be helpful in long term sustainability of a business and it will also help in business to counter with adverse scenarios and record growth so that these capital requirements are needed on to the higher side by various Central banks in order to protect these banks because there would be lower money flow into the economy at such situations and the bank will be finding very hard to sustain because many of the assets will also be defaulting, so their need to be a higher capital ratio so that they can recapitalize themselves at such situation and help them survive through such situations and hence Central Bank will always be trying to maintain a special emphasis on the capital requirement of these commercial banks.

Capital standard has been employed like Basel requirements which will be e specifying the capital maintenance according to the risk adjustment so this will be risk-adjusted capital requirements for the bank and there are also Reserve requirement according to the monetary policy by various Central banks in order to protect these banks from any adverse economic Scenario.