Bank Capital

Published Aug 22, 2023

Definition of Bank Capital

Bank capital is the amount of money that a bank has to set aside to cover potential losses. That means it is the difference between a bank’s total assets and its total liabilities. It is also known as regulatory capital or Tier 1 capital.

Example

To illustrate this, let’s look at a hypothetical bank. This bank has total assets of $100 million and total liabilities of $90 million. That means the bank has $10 million in bank capital. This capital is used to cover potential losses from bad loans, investments, and other risks.

Why Bank Capital Matters

Bank capital is an important indicator of a bank’s financial health. It is used by regulators to ensure that banks have enough money to cover potential losses. That means it is a key factor in determining a bank’s ability to withstand economic shocks and other risks.

In addition, it is also used to measure a bank’s solvency and its ability to meet its obligations. Thus, it is an important tool for regulators to ensure the stability of the banking system.