What are bank capital requirements? Why banks must hold a buffer
By SendPay Business · · 2 min read
Capital requirements are rules that make banks fund part of their lending with their own money, such as shareholders' equity, rather than only with deposits and borrowing. That buffer absorbs losses so the bank can keep going when some loans go bad.
What capital means
Capital is the part of a bank's funding that can absorb losses, mainly shareholders' equity and retained profits. Deposits are not capital, because the bank owes them back to customers.
The Basel rules
International standards from the Basel Committee on Banking Supervision, known as Basel III, set minimum capital ratios based on how risky a bank's assets are. National regulators, such as the Prudential Regulation Authority in the UK, apply them and can add extra buffers.
Capital vs liquidity
- Capital protects against losses, such as loans that are not repaid.
- Liquidity is having enough cash to pay people who want their money now.
- A bank can have plenty of capital and still face a liquidity crunch.
- Regulators set separate rules for each.
Where SendPay fits
SendPay is a technology company, not a bank, and does not take deposits. SendPay platforms are powered by licensed partners, and SendPay tells you in writing which licences apply to your platform before you pay.
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How is a capital ratio worked out?
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This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.