What is a capital bank

What is Bank capital?

Bank capital represents the total assets of the bank. It can be also defined as the difference between bank's liabilities and assets. Assets incorporate money, credits and securities, while liabilities include loan-loss reserves and debt amount. If the bank has more capital, it means bank has more potential to absorb losses.

Regulatory Bank capital

Basel III (International Banking Regulatory) develops a framework in order to define Bank capital. It partitions the Bank capital into different Tiers based on ability to handle losses and subordinations.

  • Tier 1 incorporates the book value of paid-in capital, shares, and retained earnings and intangibles items. Common equity tier 1(CET1) Instruments has no maturity, no embedded incentive and highest subordination.
  • Tier 2 is comprised of stock surplus and unsecured subordinated debt.

Book Value of Shareholders' Equity

It can also be considered as a “book value of shareholders' equity” on a bank's monetary record. Book Value of Shareholders' equity includes the following items: Retained earnings, stock, preferred equity and accumulated income. If the bank monetary records were always accurate and banks constantly made benefits, there would be no requirement for extra Bank capital. Lamentably, we don't live in a perfect world, so bank always needs cushion of Bank capital.

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