Bank capital is the part of a bank's funding that belongs to its owners and can absorb losses. It is mainly shareholders' equity, meaning paid-in share capital and retained earnings, plus certain other instruments that supervisors allow to count. Everything else a bank funds itself with, such as bank deposits and borrowing, is a debt it must repay. Capital is the cushion that lets a bank lose money on bad loans or investments and still pay its depositors in full.
Bank capital is often confused with other things. It is not the cash a bank keeps at the central bank (those are reserves), nor the minimum paid-up capital a regulator demands before granting a licence, though that sets a floor. Supervisors measure it against a bank's risks under the Basel framework set by the Basel Committee on Banking Supervision (BCBS). The detailed rules on what counts are covered in regulatory capital; this entry explains the concept and how it is measured.
Bank capital in plain terms
Think of buying a house with a deposit and a mortgage. If the house price falls a little, the loss eats into your deposit, but the lender is still safe. If prices fall by more than your deposit, the lender starts losing money too. Your deposit is your equity, your skin in the game.
A bank's capital is its owners' deposit in the business. The bank lends out much more than its owners put in, using money borrowed from savers. As long as losses stay smaller than the owners' stake, savers are untouched. A bigger cushion makes the bank safer but means each unit of profit is shared over more owner money, which is why banks and supervisors argue over how big it should be.
Capital on a bank's balance sheet
Like any company, a bank's assets equal its liabilities plus its equity. A bank with 100 of loans and securities, funded by 92 of deposits and borrowing and 8 of equity, is solvent. If 5 of its loans go bad and are written off, equity falls to 3; the bank is weaker but depositors are still covered. A loss of 10 would wipe out equity and leave the bank unable to repay everyone. The ratio of assets to equity, about 12.5 to 1 here, is the bank's leverage. Losses usually come from non-performing loans, falling securities prices or fraud, and capital is what absorbs them.
Tiers of capital under Basel III
Basel III, agreed after the 2008 financial crisis, sorts capital by how well it absorbs losses:
- Common Equity Tier 1 (CET1). Ordinary shares and retained earnings, minus deductions such as goodwill and certain tax assets. It absorbs losses while the bank is still running and is the highest-quality capital.
- Additional Tier 1 (AT1). Perpetual instruments with no fixed repayment date whose payments can be cancelled, and which convert to shares or are written down when capital falls below a trigger. Contingent convertible bonds are the best-known type.
- Tier 2. Mainly subordinated debt with an original maturity of at least five years, plus some general loan-loss provisions. It absorbs losses once a bank is failing, ranking behind depositors.
Tier 1 is CET1 plus AT1; total capital is Tier 1 plus Tier 2.
Minimum ratios and a worked example
Capital is measured against risk-weighted assets (RWA), in which each loan or security is weighted by its credit risk, market risk and operational risk. The headline measure is the capital adequacy ratio:
Under the Basel III minimums, CET1 must be at least 4.5% of RWA, Tier 1 at least 6% and total capital at least 8%. On top sits a capital conservation buffer of 2.5% of RWA in CET1, a countercyclical buffer of up to 2.5% set by national authorities, and extra charges for systemically important banks. A separate leverage ratio requires Tier 1 capital of at least 3% of total exposures, without risk weights.
Example: a bank has RWA of 1,000, CET1 of 70, AT1 of 15 and Tier 2 of 25. Its CET1 ratio is , its Tier 1 ratio and its CAR . It meets the 4.5% CET1 minimum plus the 2.5% conservation buffer exactly, so it has no spare CET1 above the buffer and would face limits on dividends if it slipped further.
What capital protects against, and its limits
Adequate capital protects depositors, reduces the need for deposit insurance payouts and public bail-outs, and supports financial stability. Because each new loan needs capital behind it, capital rules also shape how much credit the banking system can supply. Critics point out that risk weights can be gamed by moving into assets with low weights, that book values may hide losses not yet recognised, and that a well-capitalised bank can still fail in a bank run, when depositors leave faster than it can sell assets. Capital deals with solvency; liquidity risk needs separate rules. The return a bank earns, driven by its net interest margin (NIM), is spread over its capital, so higher requirements lower return on equity.
How Pakistan applies the rules
The State Bank of Pakistan introduced Basel III capital rules for scheduled banks through BPRD Circular No. 6 of 2013, phased in over several years. As of late 2026, banks must keep total capital of at least 11.5% of risk-weighted assets, made up of a 10% minimum plus a 1.5% capital conservation buffer; the buffer was cut from 2.5% to 1.5% in 2020 as COVID-19 relief. Domestic systemically important banks face additional CET1 requirements. The SBP also sets a separate minimum paid-up capital, a fixed rupee amount, as a condition of a banking licence.