Part 3/10:
A fundamental concept behind Basel III is bank capital, which can be thought of as a bank’s safety cushion. It comprises the funds shareholders invest in the bank, which do not need to be repaid. In the event of loans defaulting or investments losing value, sufficient capital ensures that the bank can cover customer deposits and absorb losses, thereby maintaining financial stability.
Regulators primarily determine how much capital banks should hold, based on the riskiness of their activities. The goal is to minimize the likelihood of bank failures that could ripple through the economy and trigger costly bailouts.