Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. Capital is supposed to protect a bank from all sorts of uninsured and unsecured risks apt to turn into losses.

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The Basel Capital Framework has its origins in the financial market turmoil that followed the breakdown of the Bretton Woods system of managed exchange rates in 1973. After the collapse of Bretton Woods, many banks incurred large foreign currency losses. On 26 June 1974, West Germany’s Federal Banking Supervisory Office withdrew Bankhaus Herstatt’s banking licence after finding that the bank’s foreign exchange exposures amounted to three times its capital.

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