Describe risk-based capital adequacy standards for banks.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Risk based capital adequacy standards have to do with the proportion of its deposits a bank must hold and not lend out.  A risk based standard is one that takes into account how risky a bank's assets are.  

Regulators want to know how likely it is that a bank's assets will go bad, causing the bank to lose its money.  They want to ensure that the bank will have enough reserves to cover such losses and avoid failing.  Therefore, they require banks that have riskier asset portfolios to hold larger reserves.  

Risk based standards, then, are standards for how much banks should hold in reserve.  They are based on the level of risk associated with the assets that the bank holds.

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