Kapitalkröfur

Kapitalkröfur, often translated as capital requirements, refers to the minimum amount of capital that financial institutions, particularly banks, are legally obligated to hold. These requirements are a crucial component of prudential regulation designed to ensure the stability and solvency of the financial system. By mandating that banks maintain a certain level of capital, regulators aim to protect depositors, prevent systemic risk, and absorb potential losses arising from unexpected market downturns or poor asset quality.

The core principle behind capital requirements is that banks should have a buffer of their own funds to absorb losses before they become insolvent. This capital acts as a cushion, reducing the likelihood of bank failures and the need for government bailouts. Different types of capital are recognized, broadly categorized into Tier 1 capital (the highest quality, most loss-absorbent, such as common equity and retained earnings) and Tier 2 capital (which can include instruments like subordinated debt).

International frameworks, most notably the Basel Accords (Basel I, II, and III), provide guidelines for setting these capital requirements globally. Basel III, for instance, introduced stricter definitions of capital, higher capital ratios, and new liquidity requirements to address weaknesses exposed by the 2008 financial crisis. The specific ratios and calculations can be complex, often involving risk-weighted assets, where different types of assets are assigned different risk weights based on their perceived probability of default. National regulatory bodies then implement and enforce these requirements within their jurisdictions.