The measurement of capital - paper issued on 5 September 1980

Quarterly Bulletin 1980 Q3
Published on 01 September 1980

In 1975 the Bank of England published the conclusions of a joint Working Party which had been formed by the Bank and the London and Scottish clearing banks to examine the nature of capital and of liquidity and to develop principles for assessing their adequacy. Two methods of assessing the adequacy of capital were outlined: a 'free resources' ratio and a 'risk asset' ratio. The first broadly relates current liabilities to capital resources, excluding that part of capital which is financing infrastructure and other non-banking assets. The second broadly relates the risk of Iosses which are inherent in the assets of the business to the capital which is available to finance such losses. The 1975 paper argued that the risk measure was the more useful, and in recent years the Bank has come to place increasing emphasis on it.

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