Bank capital is the buffer on a bank’s balance sheet that allows it to absorb losses, particularly credit losses. Although there is a great deal of excitement about bank liquidity — bank runs, just like in “It’s a Wonderful Life”! — but the main danger is the capital buffer being wiped out (insolvency). A bank run might feature at the end of the bank’s lifetime (quite often, regulators just step in), but the trigger is the insolvency. This article discusses bank capital at a high level, from a macroeconomic viewpoint.
I think the key point to make about bank capital is that it is purchased with bank liabilities (deposits). Since loans create deposits, an increased loan book increases the amount of bank deposits that can be wooed and exchanged for bank capital.
(Much as they can be wooed and exchanged for MBS - which has the added advantage of shrinking the balance sheet).
Some book suggestion where studying this theories? Thanks
I think the key point to make about bank capital is that it is purchased with bank liabilities (deposits). Since loans create deposits, an increased loan book increases the amount of bank deposits that can be wooed and exchanged for bank capital.
(Much as they can be wooed and exchanged for MBS - which has the added advantage of shrinking the balance sheet).
As ever it's about the price, not the quantity.