20-4 One function of bank capital is to protect uninsured depositors,bondholders,and creditors in the event of insolvency and liquidation.

Question

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Bank capital is a cushion that protects the bank's investors and lenders in case of losses that may arise from unexpected events. It also serves as a buffer to cover the bank's operational losses and various risks, such as credit risk, market risk, and operational risk. In the event of liquidation, the bank's capital is used to cover the losses, and uninsured depositors, bondholders, and creditors are senior to shareholders in the claim to the remaining assets. Therefore, having adequate bank capital is essential to maintain public confidence in the banking system and prevent a systemic crisis.

20-4 One Function of Bank Capital Is to Protect Uninsured