Capital adequacy standards are imposed primarily to ensure banks remain highly profitable by forcing them to invest in only the most secure, high-return projects.

Capital adequacy requirements mandate that banks hold a minimum percentage of equity (or net worth) relative to their risk-weighted assets, ensuring they can absorb unexpected losses and protect depositors.

Capital adequacy requirements limit banks’ total asset growth by capping how much they can lend, thereby directly preventing excessive expansion of credit.

Capital adequacy rules focus on ensuring banks hold enough liquid assets to meet short-term obligations, rather than primarily serving as a safeguard against long-term losses.

These requirements help build confidence among depositors and investors by ensuring that banks maintain sufficient capital to cover potential losses, thus reducing the likelihood of bank runs.