Chapter (15): The Management of Capital I. Introduction:
What is capital? It refers principally to the funds contributed by the owners of a financial firm. In the case of a commercial bank this means the stockholders –investors in the common and preferred stock that a banking firm has issued.

What is it that the owners contribute? Their money –a portion of their wealth- is placed at the financial firm’s disposal in the hope of earning a competitive rate of return on those contributed funds. Sometimes that desired rate of return on the wealth contributed by owners emerges and sometimes it doesn’t. Indeed, if the bank or other financial-service provider fails, the owners may lose everything they invested. Thus, capital consists mainly of owners’ funds placed at risk in the pursuit of an expected rate of return commensurate with the risks accepted by the owners.

II. The Many tasks Capital Performs:
The capital accounts play several vital roles in supporting the daily operations and ensuring the long-run viability of banks and other financial intermediaries.
In the first place, capital provides a cushion against the risk of failure by absorbing financial and operating losses until management can address the institution’s problems and restore its profitability.

Second, capital provides the funds needed to charter, organize, and operate a bank or other financial firm before deposits or other sources of funds come flowing in. A new institution needs start-up funding to acquire land, build or lease facilities, purchase equipment, and hire officers and staff even before opening day.

Third, capital promotes public confidence and reassures creditors (including the depositors) concerning an institution’s financial strength.

Fourth, capital provides funds for the organization’s growth and the development of new services, programs, and facilities.