A regulatory measure ensuring banks maintain sufficient capital relative to their risk-weighted assets to absorb potential losses and continue operating. It's expressed as ratios comparing different types of capital to total assets or risk-weighted assets.
From Latin 'capitalis' (of the head, principal) and 'adaequatus' (made equal to). This regulatory concept emerged in the 1980s as international banking grew and regulators needed standardized measures to prevent bank failures from spreading globally.
Capital adequacy is like requiring drivers to carry car insurance proportional to how dangerously they drive - banks taking bigger risks must hold more capital to cover potential accidents. A bank might look profitable, but if its capital adequacy ratio is too low, regulators can shut it down!
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