Final answer:
Working capital is the difference between a company's current assets and current liabilities. In banking, it is related to bank capital, which is the bank's net worth or the difference between its assets and liabilities. Banks must maintain a positive net worth to remain solvent and protect their depositors and creditors.
Step-by-step explanation:
Working capital is the excess of the current assets of a business over its current liabilities. It is a financial metric used to assess a company's short-term financial health and operational efficiency. The formula for calculating working capital is as follows:
Working Capital = Current Assets - Current Liabilities
In the context of a bank, this concept is closely related to bank capital, which represents the net worth of the bank and is the difference between the bank's assets and liabilities. Positive bank capital is essential for a bank's solvency, ensuring it has enough assets to cover its liabilities. Regulatory bodies require banks to maintain a minimum net worth to safeguard depositors and creditors, which is usually a percentage of their total assets.
A bank's balance sheet reflects its financial standing through the listing of assets and liabilities. Assets include cash, reserves held at the Federal Reserve, loans issued to customers, and securities like government bonds. Liabilities represent what the bank owes to others, such as deposits made by customers. A positive net worth or bank capital indicates a healthy financial state, whereas a negative net worth would suggest insolvency or bankruptcy.
The 'T' in a T-account separates a bank's assets and liabilities, with the assets on the left and the liabilities on the right. Net worth is included on the liabilities side to balance the T-account. However, assets will always equal liabilities plus net worth in any case.