What does it indicate when a bank is considered "undercapitalized"?

When a bank is deemed "undercapitalized," it signifies that the bank's capital levels have fallen below the minimum thresholds set by regulatory authorities. This is a critical measure of a bank's financial health and stability. Capital is essential for absorbing losses and maintaining the bank's ability to operate effectively; therefore, when a bank is undercapitalized, it could pose a risk to the bank itself, its depositors, and the broader financial system.

Regulatory requirements are established to ensure that banks have enough capital to withstand financial difficulties, and being undercapitalized can lead to increased scrutiny from regulators, potentially resulting in corrective actions, restrictions on operations, or even intervention to protect the bank's viability.