Capital requirements for banks are NOT intended to:

Question

BlackTom AI · Accepted Answer

Capital requirements for banks are designed to enhance financial stability and mitigate risk, not to hamper everyday operations.
Option 1: 'reduce a bank owner's incentives to take excessive risks.' This aligns with the purpose of capital requirements: higher capital acts as a buffer, reducing the likelihood that owners push excessive risk since losses would hit equity first. So this statement describes a real aim of capital requirements.
Option 2: 'reduce deposits.' In reality, capital requirements do not aim to reduce the amount of deposits a bank holds. Deposits are a funding source; capital rules affect the bank's leverage and loss-absorbing capacity, not the fundamental ability to attract deposits. So this statement is not a purpose of capital requirements and is incorrect as a description of their intent.
Option 3: 'put to use the excess of a bank's assets over its deposits and other liabilities.' This phrasing reflects the idea that capital represents the cushion beyond liabilities like deposits; capital requirements constrain leverage by ensuring a minimum equity buffer relative to risk-weighted assets. So this statement describes how capital is used and is accurate about the function of capital.
Option 4: 'offset incentives created by deposit insurance.' This is a recognized rationale: capital requirements help reduce moral hazard by ensuring banks have their own skin in the game, counterbalancing guarantees from deposit insurance. Hence this describes a legitimate objective.
In summary, options 1, 3, and 4 describe valid purposes or effects of capital requirements, while option 2 describes an outcome that is not intended by capital regulation.

Capital requirements for banks are NOT intended to:

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