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.|