Capital Requirement
You require capital to do anything. We all do...at least all of us who live as a participant in a modern society, with things like mortgages, car loans, college tuition payments and Frappuccinos. We also need to keep a cushion of a few months' worth of salary just in case the car breaks down, the roof falls in or you learn you have scabies.
Banks also have capital requirements. The need money to make loans and have cash available in case customers want to withdraw their savings. Since there have been bad experiences in the past (banks failing during the Depression of the 1930s, the Great Recession in 2008 and the Savings and Loan crisis of the 1980s, just to name a few) banks are also required to keep a cushion.
Also known as regulatory capital, banks must have a certain amount of "liquid capital" (able to be spent immediately) according to the level of assets they own. The Federal Deposit Insurance Corporation and the Federal Reserve, as well as state banking regulators, set these requirements and regularly audit banks to check their capital level.
The capital requirement for banks is based on the "weighted risk" of each type of asset the bank owns. If they are making a lot of real estate loans with very little in terms of down payments by their customers, that is going to be weighted heavily. Or perhaps the bank has made a lot of business loans with very little collateral given by the borrower. A requirement might state that for every dollar of residential loan made, the bank must hold nine cents of capital. For a safer loan with lots of collateral, it might be 5 cents for every dollar of loan.
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Finance: What is Capital Expenditure, i....54 Views
finance- a la shmoop. what is capex ?funny name kind of sounds like group therapy
for men trying to quit wearing hats or maybe it's a Space Age head cover [men sit in a circle]
Michael Phelps will wear on his comeback tour. sadly it's neither of those. capex
is short for capital expenditure and it simply refers to the spending of capital
to buy stuff. you know what an expenditure is ie an expense, for example
when famed surgical glove manufacturer all you need is glove spends money on [man smiles in front of warehouse]
synthetic rubber for its products, well, the buying of the gallons and gallons of
rubber is an expense. they generally use that rubber within a short timeframe of
when they bought it- a month a quarter certainly within the year. so the buckets
of rubber they buy for their raw material are just a normal expenditure
or expense. so what makes something a capital expense? well think about it like
a petty crime versus a capital crime. in a petty crime the criminal will do time
and be done and move on in life. a capital crime means someone was killed [man walks out of jail]
whole different level of serious -versus that jaywalking thing -so when a capital
expenditure comes around well its costs are taken or allocated or amortized over
long periods of time like years or even decades. you know like a prison sentence.
so when all you need is glove buys a new robotic rubber gloves machine so that [assembly line shown]
they no longer have to sew the gloves by hand, that is a capital expense. why
because it costs a lot of money 10 million bucks in fact ,and because they
expect to be able to use that thing for 20 years before it wears out and is
worthless. so they'll spend 10 million dollars in
cash today of their capital to buy it and then reduce that value by 500 grand
a year on their balance sheet each year for 20 years. the value of their capital [balance sheet shown]
expenditure will slowly decline to nothing on their books but it will
presumably more than pay for itself in saved costs applied to human labor in
making the gloves. as for actually using the [robot holds up hand]
however well it'll be a while until we can trust robots with that.
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