Capital requirements refer to the minimum amount of capital that financial institutions, such as banks, must hold to ensure their stability and solvency. These requirements are set by regulatory authorities to protect depositors and maintain confidence in the financial system. By having sufficient capital, banks can absorb losses and continue operating during economic downturns. The capital can come from various sources, including shareholder equity and retained earnings. Regulatory frameworks, such as the Basel Accords, establish specific ratios that banks must meet, ensuring they have enough capital relative to their risk-weighted assets. This helps promote a safer banking environment and reduces the likelihood of financial crises.