Capital Ratios for Commercial Banks (Financial Economics)

This revision video looks at the importance of capital ratios for commercial banks as part of the regulatory system designed to maintain financial stability.

• A commercial bank's capital ratio measures the funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis.
• The European Union runs regular “stress tests” to check whether banks have enough of a capital buffer to cope with difficult economic/financial conditions (known as “disaster scenarios”)
• Banks must maintain sufficient capital which includes money raised from selling new shares to investors and also their retained earnings (i.e. non-distributed profits)

More here from the Bank of England

How do banks get capital?