Bank capital, which is the difference between a bank’s assets and liabilities, is what investors view as the bank’s net worth or equity value. Cash, government bonds, and loans with an interest component make up the asset element of a bank’s capital (e.g., mortgages, letters of credit, and inter-bank loans). Loan-loss reserves and any outstanding debt are included in a bank’s liabilities component of its capital. The capital of a bank can be viewed as the amount by which creditors would still be paid if the bank were to liquidate its assets.
The value of a bank’s equity instruments, which can absorb losses and are paid out last in the event of a bank liquidation, is known as bank capital. While the gap between a bank’s assets and liabilities can be used to determine bank capital, national regulators have their own definition for regulatory capital.
International standards adopted by the Basel Committee on Banking Supervision through Basel I, Basel II, and Basel III international agreements make up the bulk of the banking regulatory system. The regulatory bank capital that market and banking regulators closely watch is defined by these guidelines.
Banks play a crucial role in the economy by gathering deposits and directing them to profitable uses through loans, which is why the banking sector and the concept of bank capital are subject to strict regulation. The most current international banking regulation agreement, Basel III, offers a framework for determining regulatory bank capital, however each nation may have its own standards.