This lesson focuses on the assessment of a bank’s capital adequacy, a key indicator of its financial strength .

8.1 The Purpose of Bank Capital
Bank capital is a buffer to absorb losses and protect depositors. It is the difference between a bank’s assets and liabilities. The key metrics are the capital ratios defined by the Basel framework .

8.2 Types of Capital

• Tier 1 Capital: Core capital, including equity and disclosed reserves. This is the highest quality capital.

• Common Equity Tier 1 (CET1): The highest quality of Tier 1 capital.

• Additional Tier 1: Includes instruments like perpetual bonds that can be converted to equity.

• Tier 2 Capital: Lower-quality capital, such as subordinated debt .

8.3 Risk-Weighted Assets (RWA)
Capital adequacy ratios are measured against risk-weighted assets (RWA). Different assets have different risk weights. For example, cash and government bonds have lower risk weights than corporate loans .

8.4 The Basel Framework
The Basel Accords are the primary international regulatory framework for banks. Basel III has significantly tightened capital and liquidity requirements . Students learn to calculate the key capital ratios and to interpret them in the context of the bank’s overall financial health.