Bank capital performs several important roles except:

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Reframing the question in my own words: which of the listed functions is NOT a typical role of bank capital?
Option a: 'helping to maintain public confidence and avoid bank runs in case of loan borrowers default.' Indeed, capital acts as a cushion that supports solvency and resilience, contributing to public trust and reducing the likelihood of runs when borrowers default. This is a recognized role of bank capital.
Option b: 'serving as a source of funds for expansion.' Bank capital provides a base that can support growth (e.g., through retained earnings financing expansion or meeting regulatory capital requirements that enable growth). While capital is not the same as debt funding, it does underpin growth capacity, so this is a plausible role of capital.
Option c: 'providing some protections to the depositors in case of liquidation.' In the event of liquidation, higher and well-structured capital helps absorb losses and protects insured and uninsured depositors to some extent, aligning with capital’s function of safeguarding creditors and maintaining orderly resolution.
Option d: 'increasing the bank's interest rate margin.' This option describes a pricing or pricing-spread outcome rather than a fundamental function of capital. Capital adequacy mainly influences risk management, solvency, and credibility; it does not directly set or increase the bank’s interest rate margin. The margin is more closely tied to asset-liability management, funding costs, and competitive strategy, not a direct effect of capital levels.
To summarize the reasoning for each option, we see that options a, b, and c align with established roles of bank capital in promoting solvency, growth capacity, and depositor protection, while option d represents a financial performance outcome (margin) rather than a core capital function. The contrast here hinges on the distinction between capital’s protective and regulatory roles versus pricing outcomes that result from broader balance sheet management.

MCD2170 - T2 - 2025 Pre-class Quiz Week 10

Bank capital performs several important roles except:

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