Capital Ratios for Commercial Banks (Financial Economics)
- AS, A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 4 Apr 2018
This revision video looks at the importance of capital ratios for commercial banks as part of the regulatory system designed to maintain financial stability.
- 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?