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Isn’t bank capitalization largely bank stocks, which are valued largely on the number and performance of originated or otherwise held loans? I feel like I have
by User23 4y ago
Isn’t bank capitalization largely bank stocks, which are valued largely on the number and performance of originated or otherwise held loans?
I feel like I have a pretty solid grasp on the operational mechanics of money creation, but I don’t for capitalization. The whole thing seems a little dippy though. For example isn’t the Fed “capitalized” by its largest borrower, the Treasury?
All that being said I doubt loan officers check their capitalization ratio before originating a profitable loan to a creditworthy borrower. I imagine another department checks the ratios from time to time and sells or resells loans for cash or stocks to increase the capitalization ratio as needed. I’d love to hear from someone who actually handles this.
- lottin 4y agoOP was talking about financial capital. Financial capital is the difference between assets and liabilities. If the company was liquidated right now, what would remain is the financial capital, so in a manner of speaking it's the net worth of a corporation. Regulators require banks to keep a certain amount of financial capital in accordance with the risks that they take and various other parameters in order to make sure that they are able to absorb big losses without going bankrupt.
- User23 4y agoYeah, I'm aware of the basic investopedia definition. What I don't understand is what are those assets exactly? What kind of assets can be counted as capital? Vault cash? Reserves held at the Fed? And is a performing loan capital? It's an asset that can be sold to other banks. If that's the case, then can't a bank increase its capital by originating good loans? If that's so, then capital requirements don't particularly appear to operationally constraint loan origination and deposit creation.