Bank's capital includes:

Question

BlackTom AI · Accepted Answer

Here we have a question about what constitutes a bank's capital and we need to assess each option carefully.
Option a: 'borrowed funds and accumulated retained profits.' While retained profits are part of a bank's capital, borrowed funds are liabilities, not capital. Banks finance through a mix of capital and borrowings, but borrowed funds do not form part of capital itself, so this pairing is inaccurate.
Option b: 'shareholder's funds and Accumulated retained profits.' This combination reflects the true nature of regulatory capital: funds contributed by shareholders (paid-up capital) plus profits that have been retained rather than distributed as dividends. These components correctly represent the equity base that forms the bank's capital.
Option c: 'deposits and borrowed funds.' Deposits are liabilities to the bank, not capital, and while borrowed funds are financing, they again are liabilities. Neither deposits nor typical borrowings count as capital in the balance sheet's sense of regulatory or own funds, making this option incorrect.
Option d: 'deposits and Shareholder's funds.' Although shareholder funds are part of capital, deposits are liabilities, not capital. This mixture misclassifies the nature of deposits, so this option is not correct.
In summary, the essential distinction hinges on which items constitute the bank's own funds (equity and retained earnings) rather than external obligations like deposits or borrowings. The combination in option b aligns with the standard definition of a bank's capital as shareholder equity plus accumulated retained profits.

MCD2170 - T2 - 2025 Pre-class Quiz Week 10

Bank's capital includes:

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