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Bank capital and liquidity

  • Farag, Marc

    ()

    (Bank of England)

  • Harland , Damian

    ()

    (Bank of England)

  • Nixon, Dan

    ()

    (Bank of England)

Registered author(s):

    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.

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    File URL: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130302.pdf
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    Article provided by Bank of England in its journal Bank of England Quarterly Bulletin.

    Volume (Year): 53 (2013)
    Issue (Month): 3 ()
    Pages: 201-215

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    Handle: RePEc:boe:qbullt:0110
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    1. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, June.
    2. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
    3. Tucker, Paul & Hall, Simon & Pattani, Aashish, 2013. "Macroprudential policy at the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 192-200.
    4. Tobias Adrian & Hyun Song Shin, 2010. "The changing nature of financial intermediation and the financial crisis of 2007-09," Staff Reports 439, Federal Reserve Bank of New York.
    5. Murphy, Emma & Senior, Stephen, 2013. "Changes to the Bank of England," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 20-28.
    6. Bailey, Andrew & Breeden, Sarah & Stevens, Gregory, 2012. "The Prudential Regulation Authority," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 354-362.
    7. Douglas W. Diamond & Raghuram G. Rajan, . "A Theory of Bank Capital," CRSP working papers 363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    8. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    9. Button, Richard & Pezzini, Silvia & Rossiter, Neil, 2010. "Understanding the price of new lending to households," Bank of England Quarterly Bulletin, Bank of England, vol. 50(3), pages 172-182.
    10. Robert DeYoung & Tara Rice, 2004. "How do banks make money? the fallacies of fee income," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 34-51.
    11. Debbage , Simon & Dickinson, Stephen, 2013. "The rationale for the prudential regulation and supervision of insurers," Bank of England Quarterly Bulletin, Bank of England, vol. 53(3), pages 216-222.
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