Bank Capital
Bank capital represents the financial resources a bank holds to absorb losses and protect depositors and creditors.
Meaning in Practice
Bank capital consists primarily of equity and retained earnings that provide a buffer against unexpected losses. It is categorized into different tiers based on quality and loss-absorbing capacity. Regulators set minimum capital requirements to ensure banking system resilience.
Why It Matters
Adequate bank capital strengthens financial stability and maintains confidence in the banking system. It reduces the probability of insolvency during economic downturns. Strong capital positions allow banks to continue lending even in stressed conditions.
Market Impact
Higher capital levels can enhance investor confidence and lower funding costs. However, stricter capital requirements may limit short-term profitability or lending capacity. Weak capital positions often lead to market volatility and regulatory intervention.
Example
A bank raises new equity from shareholders to increase its capital buffer and meet regulatory requirements following a period of elevated credit losses.