Regulatory capital—purpose, quantity and quality
Produced in partnership with Morrison & Foerster LLP
Regulatory capital—purpose, quantity and quality

The following Financial Services guidance note Produced in partnership with Morrison & Foerster LLP provides comprehensive and up to date legal information covering:

  • Regulatory capital—purpose, quantity and quality
  • Definition of regulatory capital
  • Purpose of regulatory capital
  • Reasons why banks need to have regulatory capital
  • Quality of regulatory capital
  • Quantity of regulatory capital

This Practice Note provides a summary of the internationally recognised requirement for financial institutions, in particular banks and investment firms, to maintain a minimum level of regulatory capital. It considers what regulatory capital is, its purpose and the quality and quantity required by current regulation. The current international standard stems from the Basel III regime as published by the Basel Committee on Banking Supervision (BCBS). On 20 June 2013, the Council of the European Union adopted the CRD IV package to implement the Basel III international reforms across Member States in Europe and to introduce stricter capital requirements for banks and investment firms. The CRD IV package was published in the Official Journal on 1 July 2013 and the majority of provisions came into effect on 1 January 2014 (for further background on CRR and CRD IV see Practice Notes: CRD IV—essentialsandCapital Requirements Directive IV: background and legislative history).

Definition of regulatory capital

Regulatory capital refers to the way a financial institution is funded, in particular the ratio of equity, debt and other instruments it is required by regulation to 'hold' compared to its assets, valued ('risk-weighted') according to the risk of not realising the full value of the asset.

Regulatory capital can be regarded as a buffer to protect against disruption caused by an unexpected decrease in the value of