What is the Basel II capital requirement expressed as a percentage?

The Basel II capital requirement is set at 8% of Risk-Weighted Assets (RWA). This standard was established by the Basel Committee on Banking Supervision to ensure that banks maintain adequate capital reserves to cover their risks, thereby promoting stability in the financial system.

The concept of Risk-Weighted Assets involves assigning different weights to various asset classes based on their risk profiles. For example, loans secured by property might carry a lower risk weight than unsecured loans. By requiring banks to hold capital equal to 8% of their RWA, Basel II aims to ensure that institutions can absorb potential losses from their risk exposures, thereby enhancing their overall solvency and resilience.

This requirement is crucial because it helps to prevent bank failures and protects depositors and the financial system at large. The 8% benchmark represents the minimum capital that banks are expected to hold, and it is derived from extensive research into banking risks and economic stability. Therefore, adhering to this standard is fundamental for effective risk management within financial institutions.