Bank Capital and Liquidity
Year: 2013
Type: article
Abstract: Bank capital, and a bank’s liquidity position, are concepts that are central to understanding what banks do, the risks they take and how best those risks should be mitigated. This article provides a primer on these concepts. It can be misleading to think of capital as ‘held’ or ‘set aside’ by banks; capital is not an asset. Rather, it is a form of funding — one that can absorb losses that could otherwise threaten a bank’s solvency. Meanwhile, liquidity problems arise due to interactions between funding and the asset side of the balance sheet — when a bank does not hold sufficient cash (or assets that can easily be converted into cash) to repay depositors and other creditors. The article also explains the role of prudential regulation of banks, which seeks to ensure that banks have sufficient capital and liquidity resources to properly account for the risks that they take.
Authors: Marc Farag, Damian Harland, Dan Nixon
Institution: Bank of England
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1761880902