NHTM - CHAPTER 15

In the field of banking, capital refers principally to those funds contributed by a bank's owners.

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According to the textbook capital and risk are intimately related to each other.

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One fundamental purpose for regulating capital is to limit losses to the federal government arising from deposit insurance claims.

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Deposit insurance subsidized by government encourages banks to increase their ratios of capital to deposits.

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Tier 2 includes undivided profits.

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Core capital includes the surplus account for stock.

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Under the international capital (Basel) agreement Tier 2 capital must be raised to a minimum of 4 percent of risk-weighted assets.

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Off-balance-sheet commitments of banks carry capital requirements under the international (Basel) capital requirements.

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Portfolio diversification refers to seeking out customers located in different communities or countries, which presumably will experience different economic conditions.

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Geographic diversification refers to the spreading out credit accounts and deposits among a wide variety of customers, including large and small business accounts, different industries, and households with a variety of sources of income and collateral.

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