Bank Capital

Bank capital is the amount of money a bank has available to cover its potential losses. It is made up of two main components: Tier 1 capital and Tier 2 capital.

Tier 1 capital is the most important type of capital and consists of common stock, preferred stock, and retained earnings. These are the most secure forms of capital because they are not at risk of being lost if the bank goes bankrupt.

Tier 2 capital is less secure than Tier 1 capital and consists of subordinated debt, loan loss reserves, and other capital instruments. These instruments are still considered to be capital because they can absorb losses if the bank does not have enough Tier 1 capital.

The amount of capital a bank is required to hold is determined by its riskiness. The more risky a bank is, the more capital it is required to hold. This is because the bank is more likely to lose money if it is taking on a lot of risk.

Bank capital is important because it helps to protect depositors and other creditors in the event that the bank fails. If a bank does not have enough capital, it may not be able to pay back its depositors and other creditors in full. This could lead to a financial crisis, as it would reduce the confidence of depositors and other creditors in the banking system.

There are a number of ways that banks can increase their capital. They can issue new shares of common stock, raise money from retained earnings, or sell subordinated debt. Banks can also reduce their risk by taking on less risk.

Bank capital is an important part of the banking system. It helps to protect depositors and other creditors and helps to prevent financial crises.