Risk Based Capital

Definition - What does Risk Based Capital mean?

Risk based capital is a certain amount of money that a financial institution must have on hand to cover the risks associated with the business it conducts on a day to day basis. The purpose of risk based capital is to prevent these institutions from lending or investing more than they can handle.

Justipedia explains Risk Based Capital

An example of risk based capital would be a bank that has $300,000,000 on hand to cover all of its risks. Because the bank has this money on hand, it can prevent a scenario where it is unable to pay its obligations if it has sudden need to do so In 1989, the government instituted requirements for risk based capital for savings institutions. Banks and other organizations subject to these requirements must act in accordance with them or else face consequences.

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