Capital is the loss buffer, not idle cash

The move: never use cash and capital as synonyms. Liquidity is timing Liquidity is about having cash or cash-like resources when obligations come due. A bank can hold highly liquid assets and still be undercapitalized if expected or unexpected losses eat through equity. Capital is loss absorption Capital is the buffer that protects creditors and the system when losses occur. It is why supervisors focus on capital adequacy, leverage, and quality of capital. Common equity absorbs losses better than temporary earnings or unstable instruments. Risk-weighted assets are the denominator Capital ratios are meaningful because the denominator is adjusted for risk.…

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