The financial encyclopedia uses cookies to improve your user experience. Find out more here!




Capital adequacy


Possession by a firm of sufficient capital for the business it is doing. This matters to the firm itself: if it is under-capitalized, a small adverse shift in circumstances can impair its solvency. Capital adequacy, therefore, matters to a firm’s creditors. In the case of banks and other financial institutions, it also matters to the regulatory authorities, whose concern is that the failure of particular firms might cause a general financial panic. The level of capital adequacy is defined by the Basel Committee of the Bank for International Settlements. National regulators can modify Basel recommendations according to their priorities.


Reference: Oxford Press Dictonary of Economics, 5th edt.