3. II. Contents:
1. Definition of Capital:
• Capital is the amount of cash
and other assets owned by a
business.
• Capital can also represent
the accumulated wealth of a
business, represented by its assets
less liabilities.
• Capital can also mean stock
or ownership in a company.
In general, capital is accumulated
assets or ownership.
4. 2. Types of capital:
2.1. Own capital:
This is capital that owners of a business (example: shareholders
and partners) provide:
Preference shares
Ordinary shares
Bonus shares
Founders' shares
2.2. Fixed capital:
This is money which is used to purchase assets that will remain
permanently in the business and help it to make a profit. Factors
determining fixed capital requirements
Nature of business
Size of business
Stage of development
Capital invested by the owners
Location of that area
5. 2.3. Working capital:
Working capital, also known as "WC", is a financial
metric which represents operating liquidity available to a
business. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating
capital. It is calculated:
Working Capital = Current Assets − Current Liabilities
6. 3. Capital banking:
3.1. Capital requirement:
The capital requirement is a bank regulation, which sets a framework
on how banks and depository must handle their capital.
In 1988, the Basel Committee on Banking Supervision decided to
introduce a capital measurement system commonly referred to as the
Basel Accord. This framework is now being replaced by a new and
significantly more complex capital adequacy framework commonly
known as Basel II.
Each national regulator normally has a very slightly different way of
calculating bank capital, designed to meet the common requirements
within their individual national legal framework.
Most developed countries implement Basel I and II, stipulate
lending limits as a multiple of a banks capital eroded by the yearly
inflation rate.
7. 3.2. Regulatory capital:
In the Basel I accord bank capital was divided into two "tiers", each
with some subdivisions:
3.2.1. Tier 1 capital:
Tier 1 capital, the more
important of the two, consists
largely of shareholders' equity.
This is the amount paid up to
originally purchase the stock (or
shares) of the Bank (not the
amount those shares are
currently trading for on the stock
exchange), retained profits
subtracting accumulated losses,
and other qualifiable Tier 1
capital securities
8. 3.2.1. Tier 2 capital:
Tier 2 capital is a measure of
a bank's financial strength with
regard to the second most reliable
form of financial capital from a
regulatory point of view. The
forms of banking capital were
largely standardized in the Basel I
accord, issued by the Basel
Committee on Banking
Supervision and left untouched by
the Basel II accord. National
regulators of most countries
around the world have
implemented these standards in
local legislation.
9. There are several classifications of tier 2 capital, which is
composed of supplementary capital. In the Basel I accord, these
are:
Undisclosed
Reserves
Undisclosed
Reserves
Subordinated-
term debt
Subordinated-
term debt
General
provisions
General
provisions
Revaluation
reserves
Revaluation
reserves
Hybrid
instruments
Hybrid
instruments
10. 3.4. Common capital ratios:
Tier 1 capital ratio = Tier 1
capital / Risk-adjusted assets
>=6%
Total capital (Tier 1 and Tier
2) ratio = Total capital (Tier 1
and Tier 2) / Risk-adjusted assets
>=10%
Leverage ratio = Tier 1
capital / Average total
consolidated assets >=5%
Common stockholders’ equity
ratio = Common stockholders’
equity / Balance sheet assets
