Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition

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Capital Instruments

This chapter discusses the range of capital instruments available to the bank treasurer to manage the institution's capital adequacy. The level of “adequacy” will be set by reference to one or more of a number of parameters, such as regulatory requirements, ratings agencies etc. These techniques are examined in later chapters, and we will have to wait until Chapter 15 to bring all of the various threads together. For now, I will assume that a decision as to the appropriate capital level has been made, and will look at how we can raise and manage this level.

“Capital” is a term which is actually remarkably hard to define in a bank—certain components, such as equity (shareholders' funds) may be straightforward, but below that it starts to get rather murky. Subordinated debt, for example, may be regarded within the organisation as a valid form of capital, but will only qualify towards regulatory requirements if certain conditions are met. Straight debt issues are more confusing still, as they may be issued not as a source of capital, but as a component of the banking business carried out with customers—term deposits can be replaced by issuing CDs, for example, and some banks even issue long-term bearer bonds (such as the “Kassen-obligationen” of the Swiss banks so beloved of the writers of political thrillers) as a form of anonymous customer deposit.

In reality, the line between “capital” and “operating liabilities” is indeed hard to draw, and banks will have ...