The 2008 global financial crisis led to material changes in the way bank capital is defined and calculated, and to more stringent capital adequacy regulations to ensure banks have sufficient capital to remain solvent without any need for taxpayer bail-outs. The specific trigger for the bankruptcy of Lehman Brothers in 2008 was an acute lack of liquidity i.e. an ability to refinance liabilities coming due and fund day-to-day activities. The acute liquidity crisis was directly precipitated by fears about the bank’s solvency.
Key learning objectives:
What is bank solvency and why are low solvency levels a problem?
What improvements have been made to capital standards in recent years?
Define a bank’s basic capital structure today