Basel Capital Accord
It has long been recognized that risks and banking goes hand in hand together. While other companies such as those in manufacturing, trading and other industrial firms are head over heels in avoiding risks, it's a different scenario for the banking sector. Banks earn money (in the form of interest earnings) by seeking risks (e.g., looking for borrower), understanding those risks (assessing the borrower) and taking them (lending to the borrower).
With risks (possibility that unexpected events will result in losses to the bank) being an inherent part of banking, one can only wonder if banks are protected from the possible adverse effects of risks taking. Is there a forcefield that shields banks from unexpected turn of events?
Frankly, there is no forcefield that can shield banks from risks the way forcefield shielded Camp Big Falcon from attacks of the Bolzanian (oh, how I miss Voltez V!). But when it's raining and we want to go out, we either use a jacket, an umbrella, or at best a raincoat to protect ourselves. Oh yes, in the banking industry, we also have something similar to those things. I'll call it CAPITAL.
Capital, Defined
For an entrepreneur, capital will simply mean the money invested in the business. An accountant layman's definition of capital would be stockholder's equity computed by summing up all of the company's assets and deducting the total of the company's liabilities. While these definitions are right, capital for banks is defined in a different way. Banks' capital is the amount held or required to be held by a financial institution to underpin the risk of loss in value of exposures, businesses etc., so as to protect the depositors and general creditors against loss.
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