Bank capital: definition, meaning and types. Commercial bank capital

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The term "commercial bank" originated at the dawn of banking. This was due to the fact that credit organizations then served mainly trade, and only then - industrial production. Today, a commercial bank is an institution that performs up to 200 financial transactions, the main of which are accepting funds for deposits, lending, and cash management services. Any kind of activity of such organizations is impossible without the availability of capital. Let's take a closer look at this concept.

What is the capital of a commercial bank?

Capital is the sum of all sources of bank funds. From here it is divided into two broad categories:

1. Own banking.

2. Attracted:

• deposit - funds held on the accounts of clients of a banking organization;
• non-deposit - funds received in the bank's vaults from the repayment of loans by its creditors, as well as from the sale of their own debt obligations.

A bank's capital adequacy is the most important indicator of its reliability; determines the ability to cope with possible financialproblems on their own, and not to the detriment of their clients. For Russian credit institutions, an equity capital adequacy ratio has been introduced - N1.0. Its permissible minimum value is 8%. If H1.0 of any bank falls below 2%, its license is urgently revoked.

Now let's deal with the equity capital of Russian banks.

The concept of "own capital"

Equity is, in turn, the sum of several components:

• statutory funds;
• additional capital;
• reserve fund;
• insurance reserves;
• special funds;
• profit not distributed during the reporting period.

Equity of banks on average covers 10-20% of their total need for funds. This is due to the following:

• Banks are intermediaries in the financial market, they work primarily with attracted rather than their own funds.
• Bank assets are highly liquid and quickly marketable, making large amounts of equity capital unnecessary.
• The probability of a sharp decline in the share of attracted funds is very small - mass withdrawal of money from deposits by the population is unlikely due to the existing deposit insurance system.

Let's analyze each component of the bank's equity capital in more detail.

Share Capital

The formation of the authorized capital is due to the issuance of ordinary and preferred shares. All securities must be registered. The first issue necessarily consists of ordinary shares only and is distributed among the founders, subsequent issues - among citizens of the Russian Federation and non-residents, constituent entities of the Russian Federation, non-governmental institutions and state enterprises.

The difference between common and preferred securities is as follows:

• The owner of an ordinary share is en titled to vote at the shareholders' meeting and is en titled to receive dividends. However, payments to him are accrued only after dividends are accrued to owners of preferred shares.
• The owner of this preferred security is not en titled to vote at shareholders' meetings, but he is paid a fixed amount of dividends, and he can file a property claim in court when the bank is liquidated.

If the bank is a share capital, then its authorized capital consists of the contribution of certain shares by the founders. In the case when it is established with the attraction of foreign investments, it is allowed to keep a certain part of it in foreign currency.

Reserve and other funds

The purpose of creating a reserve fund is to compensate for financial losses on active operations. If the amount of income received is lower than planned, then the funds from here are used to pay dividends on preferred shares and interest on bonds.

Other funds are formed only at the expense of bank profits. The procedure for their creation and use is strictly regulated by the legislative acts of the Russian Federation.

Additional capital

Additional capital is the total amount that is formed by:

• Price of property received by the bank for free use from individuals and legal entities.
• Share premium - occurs when the value of a share at its issue is higher than its par value.
• Increase in the value of the property of a banking organization during its subsequent revaluation.

Insurance reserves

Insurance reserves must necessarily be formed at the expense of the bank's profit - this is attributed by the legislation. Their main purpose is to mitigate the negative financial consequences of a decrease in the value of any assets.

This category is made up of reserves:

• For possible loan losses.
• According to accounts receivable.
• For the possible depreciation of stocks and bonds, etc.

Retained earnings

Income not distributed during the reporting period, the profit remaining after the repayment of the entire tax burden, can rightfully be attributed to the credit institution's own funds. The bank can dispose of this income in its own interests.

Equity functions

The bank's equity performs a number of important functions:

• Turnaround - a banking organization invests clients' funds in a number of profitable operations, which brings income both to itself and to depositors.
• Operational - it is equity capital that is intended to be the main source of cash resources for a creditorganizations.
• Insurance - own funds help the bank to stay afloat in case of financial difficulties.

Banks and maternity capital

In conclusion, let's talk about maternity capital - financial support for families, a variety of government incentives to increase the birth rate. Naturally, it does not apply to the bank's funds, but is the property of its client. This amount, which for 2017 is 453,026 rubles, is paid to parents or adoptive parents after the birth or adoption of a second child. Personal certificate "Maternity capital" can be used for the following:

• Formation of the funded part of the parent's pension.
• Improve family living conditions.
• Paying for a child's education.

Let's list the main banks working with maternity capital:

• DeltaCredit - maternity certificate can be used for early mortgage repayment.
• "UniCredit" - capital is used to repay a loan when buying a home on the secondary market.
• Sberbank - the certificate is used not only to pay for an existing mortgage loan to buy an apartment in a new building or on the secondary market, but also to make a down payment.
• "VTB-24" - maternity capital can become both a down payment and the amount to pay off an already taken mortgage.
• "Opening" - here you can only partially redeem a family certificatemortgage.

The bank's capital is the amount of own funds, which consists of several elements. In relation to credit organizations, it has a number of features and characteristic functions, which we also analyzed in this material.