Risk-Based Capital Requirement

Following the global financial crisis of 2007-08, banks have been subject to stringent risk-based capital requirements that set their capital adequacy relative to their risk-weighted assets (RWA) i.e. assets weighted for credit, market and operational risk, and relative to assets held in the trading book and the banking book. Risk-based capital requirements hold banks to a series of minimum ratios: Common Equity Tier 1 to RWA, Tier 1 capital to RWA and total capital to RWA. Bank regulatory capital categories consist of going-concern capital (Common Equity Tier 1 and Additional Tier 1 instruments) and gone-concern capital (Tier 2 instruments).