FIRREA's risk-based capital standards aim to ensure what?

FIRREA, or the Financial Institutions Reform, Recovery, and Enforcement Act, was enacted in response to the savings and loan crisis of the 1980s and 1990s. One of its primary objectives is to establish risk-based capital standards for depository institutions, which are banks and savings associations. These standards require institutions to maintain a certain level of capital relative to their risk exposure, thereby promoting sound risk management practices.

The focus on stability is crucial because it helps prevent financial crises by ensuring that depository institutions can absorb losses effectively and continue to operate without failing. By requiring institutions to have a sufficient capital buffer, FIRREA contributes to the overall health of the financial system, enhancing public confidence and minimizing the risk of bank runs or systemic failures.

In contrast, high dividends for shareholders, increased mortgage loan approvals, and reduced interest rates for borrowers do not directly relate to the fundamental purpose of the risk-based capital requirements set forth by FIRREA. These operational aspects, while important to the financial industry, are not central to the act's focus on maintaining the stability and soundness of depository institutions.