Why do banks maintain a certain level of bank capital?
A) These funds are required to satisfy shareholders in annual statements.
B) These funds are reserved as salary bonuses for top management.
C) These precautionary funds are held against the illiquidity risks of loans and bonds.
D) These are funds to be invested in emerging market economies.
E) These funds are set aside for taxation purposes.

Question

Quizplus · Accepted Answer

Banks maintain a certain level of bank capital as precautionary funds against the illiquidity risks of loans and bonds. This helps to absorb losses in the event of unexpected loan defaults or market downturns.

Why Do Banks Maintain a Certain Level of Bank Capital