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Your money and the financial system Page 8<br />
Capital and liquidity:<br />
the building blocks of a<br />
safer financial system<br />
Capital and liquidity are key ingredients for<br />
a safe and secure financial system.<br />
A bank balance sheet provides<br />
a snapshot of its financial<br />
position.<br />
It is the simplest way to show how<br />
a bank’s capital and liquidity are<br />
important.<br />
CAPITAL<br />
A bank’s capital includes money<br />
invested in the bank by its<br />
shareholders, plus any profits<br />
it has saved up from previous<br />
years.<br />
The balance sheet has two equal<br />
sides.<br />
One side shows a bank’s assets.<br />
The other shows its capital and<br />
liabilities.<br />
LIABILITIES<br />
A bank’s liabilities are money<br />
that doesn’t belong to the bank<br />
and which it will have to repay.<br />
This is money it holds on behalf<br />
of customers in current and<br />
savings accounts, together with<br />
the proceeds of bond sales to<br />
investors.<br />
Bonds sold by a bank are IOUs<br />
that allow it to raise money from<br />
pension funds or other banks.
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