II. Contents:1. Definition of Capital:• Capital is the amount of cashand other assets owned by abusiness.• Capital can also representthe accumulated wealth of abusiness, represented by its assetsless liabilities.• Capital can also mean stockor ownership in a company.In general, capital is accumulatedassets or ownership.
2. Types of capital:2.1. Own capital:This is capital that owners of a business (example: shareholdersand partners) provide:Preference sharesOrdinary sharesBonus sharesFounders shares2.2. Fixed capital:This is money which is used to purchase assets that will remainpermanently in the business and help it to make a profit. Factorsdetermining fixed capital requirementsNature of businessSize of businessStage of developmentCapital invested by the ownersLocation of that area
2.3. Working capital:Working capital, also known as "WC", is a financialmetric which represents operating liquidity available to abusiness. Along with fixed assets such as plant andequipment, working capital is considered a part of operatingcapital. It is calculated:Working Capital = Current Assets − Current Liabilities
3. Capital banking:3.1. Capital requirement:The capital requirement is a bank regulation, which sets a frameworkon how banks and depository must handle their capital.In 1988, the Basel Committee on Banking Supervision decided tointroduce a capital measurement system commonly referred to as theBasel Accord. This framework is now being replaced by a new andsignificantly more complex capital adequacy framework commonlyknown as Basel II.Each national regulator normally has a very slightly different way ofcalculating bank capital, designed to meet the common requirementswithin their individual national legal framework.Most developed countries implement Basel I and II, stipulatelending limits as a multiple of a banks capital eroded by the yearlyinflation rate.
3.2. Regulatory capital:In the Basel I accord bank capital was divided into two "tiers", eachwith some subdivisions:3.2.1. Tier 1 capital:Tier 1 capital, the moreimportant of the two, consistslargely of shareholders equity.This is the amount paid up tooriginally purchase the stock (orshares) of the Bank (not theamount those shares arecurrently trading for on the stockexchange), retained profitssubtracting accumulated losses,and other qualifiable Tier 1capital securities
3.2.1. Tier 2 capital:Tier 2 capital is a measure ofa banks financial strength withregard to the second most reliableform of financial capital from aregulatory point of view. Theforms of banking capital werelargely standardized in the Basel Iaccord, issued by the BaselCommittee on BankingSupervision and left untouched bythe Basel II accord. Nationalregulators of most countriesaround the world haveimplemented these standards inlocal legislation.
There are several classifications of tier 2 capital, which iscomposed of supplementary capital. In the Basel I accord, theseare:UndisclosedReservesUndisclosedReservesSubordinated-term debtSubordinated-term debtGeneralprovisionsGeneralprovisionsRevaluationreservesRevaluationreservesHybridinstrumentsHybridinstruments
3.4. Common capital ratios: Tier 1 capital ratio = Tier 1capital / Risk-adjusted assets>=6% Total capital (Tier 1 and Tier2) ratio = Total capital (Tier 1and Tier 2) / Risk-adjusted assets>=10% Leverage ratio = Tier 1capital / Average totalconsolidated assets >=5% Common stockholders’ equityratio = Common stockholders’equity / Balance sheet assets