Capital requirement (also known as
regulatory capital or
capital adequacy) is the amount of capital a
bank or other
financial institution has to hold as required by its
financial regulator. This is usually expressed as a
capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with
reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets.