Capital adequacy is the minimum level of capital required, by regulation, to be held by a bank. It is also a good measure of a bank's net worth and reflects a bank's ability to bear losses without becoming insolvent. As regulator, the PBOC realized early the importance of having sufficient reserves to offset losses from bad debt. Prior to March 1998, the reserves required were 18 to 20% of deposits. Now there is a legal requirement for banks to hold a minimum capital adequacy ratio of 8%. The main reason for this reduction was to improve the economics of the banks in China.
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