Definition of bank capital

The buffer storage of cash and safe assets that banks hold and to which they need access in order to protect creditors in case the banks assets are liquidated.  The bank's capital/asset ratio is a measure of its financial health. Bank regulators require this to be above a prescribed minimum level. [1]

It is the funds – traditionally a mix of equity and debt – that banks have to hold in reserve to support their business. Bank capital has been in the spotlight since the financial crisis began.

How is it measured? The two capital ratios that banks routinely cite are the tier one capital ratio and a subset of that – the core tier one capital ratio, also called the equity tier one ratio. Tier one is essentially top-notch capital, with core tier one a subset comprising the best of the best. There is also tier two capital, consisting largely of subordinated debt, but that is gradually becoming irrelevant for regulatory purposes. [2]


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