Question

Explain why risk based capital requirements should alter pricing of loans and securities

Answer 1

Risk-based capital requirement refers to a rule that establishes minimum regulatory capital for financial institutions. Risk-based capital requirements exist to protect financial firms, their investors, their clients and the economy as a whole. These requirements ensure that each financial institution has enough capital on hand to sustain operating losses while maintaining a safe and efficient market.

• Risk-based capital requirements are minimum capital requirements for banks set by regulators.
• There is a permanent floor for these requirements—8% for total risk-based capital (tier 2) l and 4% for tier 1 risk-based capital.
• Tier 1 capital includes common stock, reserves, retained earnings and certain preferred stock. Tier 2 is a financial institution's assets minus liabilities.
• Risk-based capital requirements act as a cushion to protect a company from insolve