Definition of bank capital

Bank capital is the value of the bank's assets minus its liabilities, or debts. Assets include cash, loans and securities, while liabilities cover customer deposits, and money owed to other banks and bondholders.

If all the assets were sold and all the debts repaid, the value which would be left over is equal to the bank’s equity. A bank's capital is made up of certain loss-absorbing bonds, as well as its equity. These bonds include additional tier 1 bonds and tier 2 bonds. These bonds have equity-like features, which is why regulators allow them to count towards a banks' capital.

The more capital there is, this means the bank can absorb more losses on its assets before it becomes insolvent.

Since the 2008 global financial crisis began, bank capital has been in the spotlight. Regulators, which act on behalf of governments, require this to be above a prescribed minimum level. Typically capital is measured as a ratio against a bank's risk-weighted assets. [1]