Regulatory capital refers to the minimum amount of capital that financial institutions, such as banks, must hold to ensure their stability and protect depositors. This capital acts as a buffer against potential losses, helping to maintain confidence in the financial system. Regulatory bodies, like the Basel Committee on Banking Supervision, set these requirements to promote sound banking practices. The capital is typically categorized into different tiers, with Tier 1 capital being the most important, consisting mainly of common equity. By maintaining adequate regulatory capital, banks can absorb losses while continuing to operate, thereby reducing the risk of financial crises and protecting the broader economy.