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Bank capital and liquidity

Author

Listed:
  • Marc Farag

    (Bank of England)

  • Damian Harland

    (Bank of England)

  • Dan Nixon

    (Bank of England)

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.

Suggested Citation

  • Marc Farag & Damian Harland & Dan Nixon, 2013. "Bank capital and liquidity," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 201-215.
    • Handle: RePEc:boe:qbullt:0110
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    References listed on IDEAS

    as
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