Final answer:
Bank capital is crucial for financial stability and serves as a buffer against losses, ensuring that banks have the capacity to cover their liabilities and support their lending activities. The correct answer is option a.
Step-by-step explanation:
Bank capital is the difference between a bank's assets and its liabilities, which essentially represents the bank's net worth. This capital is of critical importance for banks because it serves as a cushion against losses and as a basis for the bank's lending capacity. Capital adequacy is regulated by supervisory authorities to ensure that banks are able to withstand financial distress and protect their depositors and other creditors.
A bank's balance sheet shows all the assets, such as cash, loans, and bonds, and liabilities, including customer deposits and other debts. Banks need to maintain a positive net worth, or capital, to remain solvent and operational. Negative net worth occurs when the value of liabilities exceeds that of assets, which can happen due to reasons like a high default rate on loans or a mismatch in interest rates between assets and liabilities.
Moreover, banks serve as financial intermediaries in the economy, facilitating transactions and the use of money by offering accounts for buying, selling, saving, or borrowing. Regulation requires banks to hold a certain percentage of their assets as bank capital, commonly referred to as a capital requirement, to guard against potential losses and ensure financial stability within the broader financial system.