Final answer:
Regulatory-defined capital and required leverage ratios rely on reserve ratios and capital requirements set by financial regulations to protect bank solvency and limit excessive risk by controlling banks' investment options.
Step-by-step explanation:
Regulatory-defined capital and required leverage ratios are based in whole or in part on specific financial regulation criteria used to ensure the solvency and overall health of depository institutions. The dollar amount of a depository institution's reserve requirement is determined by applying prescribed reserve ratios, which are a minimum percentage of their deposits that banks must hold on hand. These funds are primarily housed in the bank's account at the Federal Reserve. Capital requirements are another crucial aspect of banking regulation, designed to ensure that banks have enough capital to cover unexpected losses. Banks are also subject to restrictions to avoid excessive risk by limiting the types of investments they can make, such as prohibiting investments in the stock market.