What the bank owes
Mostly deposits — customers’ money the bank must be ready to return on demand. It owes this whether times are good or bad.
What the bank owns
Loans it has made, securities it holds, cash. Their value can rise — and fall.
The cushion in between
The owners’ stake, and the gap between the two: capital = assets − liabilities. When assets lose value, capital takes the hit first.
Capital absorbs the blow
Suppose assets lose value — fast. When a bank suffers rapid asset depreciation, like SVB in 2023, the loss lands on capital. Assets and capital shrink together; deposits are untouched.
The cushion is finite
Push far enough and capital reaches zero. Now the bank’s assets are worth less than what it owes — it is insolvent.
Includes some debt-like instruments (Additional Tier 1, Tier 2) and strips out items like goodwill.
The pure accounting line: share capital plus retained earnings. Related, but not identical.