Capital adequacy refers to the financial strength of a bank or financial institution, measured by the amount of capital it holds relative to its risk-weighted assets. This concept ensures that banks have enough capital to absorb potential losses, protecting depositors and maintaining stability in the financial system. Regulatory bodies, such as the Basel Committee on Banking Supervision, set minimum capital requirements to promote sound banking practices. The primary goal of capital adequacy is to safeguard the interests of stakeholders, including customers and investors. By maintaining adequate capital levels, banks can continue to operate effectively during economic downturns and unexpected financial challenges, thereby fostering trust in the banking system.