A regulatory policy (i.e., a policy implemented by central banks and other regulatory authorities) that permits banks and financial institutions to continue operating even when their capital is fully depleted. Regulators give banks extended periods of time during which they have to comply with regulatory requirements (by securing new capital funds). This inaction reflects the unwillingness of regulators to take disciplinary action against problem banks for some period of time.
Regulatory forbearance is also known as capital forbearance
