who makes a financial or "sweat equity" investment, or issuing additional shares. Undercapitalization may result from failure of a business to take advantage of these capital sources, or from inability to raise capital using any of these sources. Bankruptcy of an undercapitalized subsidiary When a subsidiary of a corporation files for bankruptcy, there may be reason to suspect that it was deliberately undercapitalized and mismanaged for the benefit of the parent corporation. The main cause of failure may have been excessive payments to the parent for goods or services provided by the parent, or inadequate charges for goods or services provided to the parent. In effect, capital provided by other investors was channeled to the parent corporation until the subsidiary failed. These cases can be extremely difficult to prove, but the Deep Rock doctrine ensures that the parent corporation's claims are only settled after all other claims. However, as decided in Walkovszky v. Carlton, the parent corporation is not responsible for settling claims in excess of remaining assets when an undercapitalized subsidiary fails. Banking industry In the banking industry, undercapitalization refers to having insufficient capital to cover foreseeable risks. United States The Federal Deposit Insurance Corporation (FDIC) classifies banks according to their risk-based capital ratio: Well capitalized: 10% or higher Adequately capitalized: 8% or higher Undercapitalized: less than 8% Significantly undercapitalized: less than 6% Critically undercapitalized: less than 2% When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank. The subprime mortgage crisis has shown that banks and other mortgage issuers in the US were undercapitalized, failing to ensure that they had sufficient capital or insurance to cover the risk of mortgage defaults in the event of the bursting of a housing price bubble. Since the affected institutions were important sources of capital to other industries, this triggered a global financial crisis during 2007-2008. Macroeconomics A country or sector of the economy may be undercapitalized in the sense that businesses in that country or sector are handicapped by lack of affordable investment funds. This can be caused by political instability, by lack of confidence in the rule of law, by constraints on foreign direct investment imposed by