Question

Which of the following statements is true about capital requirements?

Group of answer choices

Regulators prefer higher capital requirements because it provides an additional cushion to absorb losses.

Bankers prefer higher capital because it is the least expensive source of financing.

Higher capital requirements increase credit risk.

Risk-based capital requirements allow banks ignore off-balance sheet commitments.

Answer 1

Capital requirement:
It is the amount which banks or other financial institutions should maintain as required by its financial regulators.

It is important because it is that part of an asset which is used to
1. Repay customers or depositors.
2. To help maintain liquidity.
3. To help against unexpected losses (NPA).  

ANSWER: Regulators prefer higher capital requirements because it provides an additional cushion to absorb losses.