International Risk-Based Capital Standard : History and Explanation

A business firm's capital is expected to serve a variety of purposes. In the case of a bank, capital helps establish a level of confidence sufficient to attract enough deposits to fund its operations. Further, capital serves as a cushion to absorb unforeseen losses so that the bank can continue in business. Agreement on what constitutes sufficient capital, however, is not always easy to reach. In fact, from the earliest attempts to measure capital adequacy bankers and regulators have disputed what constitutes “capital” and what is “adequate.”