Recent legislation and regulatory initiatives make it clearer than ever: capital is king. The Dodd-Frank Act repeatedly states that the regulators are to set stricter capital requirements, especially for systemically important banks. Likewise, the proposed new capital framework, Basel III, would impose higher capital mandates for all internationally active banks.
There is no question that capital serves important purposes. Capital represents the shareholders' equity investment in a financial institution. Capital provides a source of funds to absorb unexpected losses. It provides a buffer to protect the federal deposit insurance fund. And as capital puts investors' funds at risk, it reduces the moral hazard created when institutions invest other people's money and none of their own.