Define capital. Explain several roles capital plays for a financial institution.

Question

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The Answer is Capital provides an equity cushion protecting against potential losses on a financial institution's assets, as well as other operating losses. Capital also provides protection against insolvency, since Equity capital is equal to Total Assets less Total liabilities, for a firm to be solvent its total assets must be greater than its total liabilities (i.e. Positive Equity Capital). Hence, capital provides insurance in the event of losses, ensuring the integrity of the payments system and provides long-term funds for long-term investments and growth and provides confidence for uninsured deposits and debt-holders. Capital also provides protection against regulatory interferences, allows for higher credit ratings and provides extra borrowing capacity, and is part of an optimal capital structure that allows for a lower weighted average cost of capital.

Define Capital