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Your money and the financial system Page 10 Why is a bank’s capital important An unexpected slowdown in the economy can mean some borrowers get behind on their repayments and some loans may not get repaid at all. Solvent bank A bank can make financial losses if some of its risky loans are not repaid. This shows up on its balance sheet as a fall in the value of its assets. A BANK BALANCE SHEET LIABILITIES ASSETS CAPITAL – SHAREHOLDERS’ MONEY – RESERVES FROM PAST PROFITS DEPOSITS – MONEY IN CURRENT ACCOUNTS – MONEY IN SAVINGS ACCOUNTS LOSSES ON RISKY LOANS – TO HOUSEHOLDS – TO BUSINESSES – TO OTHER BANKS SAFER LOANS – TO HOUSEHOLDS – TO BUSINESSES – TO OTHER BANKS A bank’s capital acts as a shock absorber to pay for the unexpected losses it makes on its risky loans. Its balance sheet shows a fall in capital equal to the value of its losses. A solvent bank has more than enough capital to pay for the unexpected losses it makes on risky loans. In the picture, the white box labelled CAPITAL is larger than LOSSES ON RISKY LOANS. BONDS – MONEY FROM BOND SALES TO INVESTORS LIQUID ASSETS – CASH – DEPOSITS AT BANK OF ENGLAND – GOVERNMENT BONDS This protects a bank’s depositors and the money it borrows from investors.
Page 11 A bank is insolvent if its capital is smaller than the unexpected losses it makes on risky loans. In the balance sheet picture, the white box labelled CAPITAL is smaller than the box labelled LOSSES ON RISKY LOANS. In this case, a bank’s capital is too small to protect all of the money it owes to depositors and investors. A BANK BALANCE SHEET LIABILITIES ASSETS CAPITAL – SHAREHOLDERS’ MONEY – RESERVES FROM PAST PROFITS It’s the financial regulator’s job to ensure a bank protects its depositors by holding enough capital to meet unexpected losses. Healthy banks with more capital can lend more to support the economy. LOSSES ON RISKY LOANS – TO HOUSEHOLDS – TO BUSINESSES – TO OTHER BANKS Insolvent bank DEPOSITS – MONEY IN CURRENT ACCOUNTS – MONEY IN SAVINGS ACCOUNTS SAFER LOANS – TO HOUSEHOLDS – TO BUSINESSES – TO OTHER BANKS BONDS – MONEY FROM BOND SALES TO INVESTORS LIQUID ASSETS – CASH – DEPOSITS AT BANK OF ENGLAND – GOVERNMENT BONDS
Page 1 and 2: Your money and the financial system
Page 3 and 4: Page 3 The Bank of England is able
Page 5 and 6: Page 5 In the UK, the high-street b
Page 7 and 8: Page 7 Each day the financial syste
Page 9: Page 9 ASSETS A bank uses its capit
Page 13 and 14: Page 13 A bank is insolvent if with
Page 15 and 16: Page 15 The Financial Policy Commit
Page 17 and 18: BUILDING SOCIETIES Page 17 The FPC
Page 19 and 20: Page 19 The PRA uses judgement to f
Page 21 and 22: Page 21 Only banks and building soc
Page 23 and 24: Page 23 YOUR MONEY AND THE FINANCIA

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