What is Risk-Based Capital Ratio?

Risk Based Capital Ratio is a rule that establishes a minimum liquid reserve for financial institutions. Risk- based capital requirements protect firms, investors and the economy, by allowing a given financial institution to maintain enough capital to sustain a certain level of operating losses to maintain an efficient market. Following the onset of the global financial crisis in 2007, the severity of which was exacerbated by a lack of reserve capital to deal with heightened risk levels, the G20 came together in Pittsburgh to craft a mandate intended to curtail the opacity, over-leveraging, and incestuous nature of the world's derivatives markets. As a result, a slew of new risk requirements and collateral regulations and practices were put in place, including the Basel Committee on Banking Supervision's Basel III directive (in conjunction with the Dodd-Frank, Mifid, and EMIR rules).In June 2011, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation accepted a rule that enforces a permanent floor for risk-based capital requirements.