The more capital backing a bank, the bigger the loss its shareholders can suffer, before losses spread to deposit holders and providers of debt.

Question

Quizplus · Accepted Answer

This statement is true. With a larger capital base, a bank can absorb more losses before it becomes insolvent and is unable to repay its debt holders and depositors. Thus, a higher level of capital provides a buffer against potential losses, reducing the risk for deposit holders and providers of debt.

The More Capital Backing a Bank, the Bigger the Loss