A bank's potential lack of sufficient capital reserves to meet regulatory requirements is an example of which type of risk?

A bank's potential lack of sufficient capital reserves to meet regulatory requirements falls under the category of compliance risk. Compliance risk refers to the possibility of legal or regulatory actions against a financial institution due to non-compliance with laws, regulations, or internal policies. In this context, regulatory capital requirements are established by financial authorities to ensure that banks maintain a sufficient cushion to absorb losses and support their ongoing operations. If a bank is undercapitalized, it may face penalties, restrictions, or even the loss of its banking license, highlighting the critical nature of adhering to these regulatory requirements.

This situation directly ties into compliance risk as it revolves around the bank's obligation to adhere to stated regulations. Addressing capital adequacy is crucial to maintaining both regulatory compliance and operational viability, making this scenario a clear example of compliance risk in action.