The amounts of money (capital) that are allocated to high-risk venues (e.g., speculative activity, high-risk, high-reward investments). In other words, it refers to the funds designated for investments that carry a great amount of risk, with the potential for high returns.

Generally speaking, risk capital denotes financial resources (that is, own funds requirements, equity, shareholder funds) that are provided by the owners / investors of a company as a means to support its business and operations. By its specific nature, risk capital is void of any explicit guarantee that those funds will be returned (and hence the funds are said to be at-risk. Compare: capital at risk).

However, and in general contexts, all types of monetary and non-monetary assets that are exposed to potential losses in value are classified as risk capital. This includes any money or assets that are exposed to a possible loss in value, in addition those funds earmarked for highly speculative investments. Risk capital relates to the equity financing of companies that have perceived high-growth potential during their early set-up and growth stages.

When a firm decides to secure external funding through debt liabilities (loans, issuance of bonds, etc.) the amount of risk capital would have a direct impact on the credit risk of the debts involved.

In a regulatory context, it is essential that a bank maintains a sufficient buffer, or risk capital, to cover potential losses. Shareholders have an interest in making high returns on the capital invested in the bank and thus that part of shareholders’ equity is usually assigned to account for losses that may arise in the process. For creditors and other stakeholders, on the other hand, it is important that risk capital is maintained at adequate levels as defined  by the capital adequacy rules which set minimum requirements on the size of the buffer based on how much risk the bank can be exposed to. Regulated financial institutions such as banks and insurance firms cannot determine amounts of risk capital on discretion but are required to follow applicable regulatory frameworks (within a given jurisdiction).