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Capital Ratios for Commercial Banks (Financial Economics)

Level:
A-Level, IB Diploma
Board:
AQA, Edexcel, Eduqas, IB, OCR, WJEC

Last updated 4 Apr 2018

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This revision video looks at the importance of capital ratios for commercial banks as part of the regulatory system designed to maintain financial stability.

Financial Economics - Capital Ratios for Commercial Banks
  • A commercial bank's capital ratio measures the funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis.
  • The European Union runs regular “stress tests” to check whether banks have enough of a capital buffer to cope with difficult economic/financial conditions (known as “disaster scenarios”)
  • Banks must maintain sufficient capital which includes money raised from selling new shares to investors and also their retained earnings (i.e. non-distributed profits)

More here from the Bank of England

How do banks get capital?

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