Thin capitalisation: Difference between revisions
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{{anat|crr}} | {{anat|crr|}}A company that doesn’t have much in the way of shareholders’ equity, which means if it enters into significant financial contracts, it is liable to blow up, unless it carefully documents them. | ||
A company that doesn’t have much in the way of shareholders’ equity, which means if it enters into significant financial contracts, it is liable to blow up, unless it carefully documents them. | |||
A [[special purpose vehicle]] is just such a company which uses the technique of applying [[limited recourse]] to all of its contractual obligations so that it is [[bankruptcy remote]]. Its capital can be as low as $1000. | A [[special purpose vehicle]] is just such a company which uses the technique of applying [[limited recourse]] to all of its contractual obligations so that it is [[bankruptcy remote]]. Its capital can be as low as $1000. | ||
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[[Bank]]s, by contrast, are [[fat capitalisation|fatly capitalised]]. Well, they would be, if there were such a term in common usage, at least as long as regulators remember not to go soft (periodically, they forget) and weaken capitalisation regulations. | [[Bank]]s, by contrast, are [[fat capitalisation|fatly capitalised]]. Well, they would be, if there were such a term in common usage, at least as long as regulators remember not to go soft (periodically, they forget) and weaken capitalisation regulations. | ||
{{ | {{sa}} | ||
*{{tag|regulatory capital}} | *{{tag|regulatory capital}} | ||
*[[Bankruptcy remoteness]] | *[[Bankruptcy remoteness]] | ||
*[[Limited recourse]] | *[[Limited recourse]] | ||
*[[SPV]] | *[[SPV]] | ||
Latest revision as of 10:33, 1 March 2023
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Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works.
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A company that doesn’t have much in the way of shareholders’ equity, which means if it enters into significant financial contracts, it is liable to blow up, unless it carefully documents them.
A special purpose vehicle is just such a company which uses the technique of applying limited recourse to all of its contractual obligations so that it is bankruptcy remote. Its capital can be as low as $1000.
Asset managers also tend to be (comparatively) thinly capitalised (but nothing like as thinly as SPVs do, as they generally act for the account of the funds that they manage, and aren't subject to any regulatory requirements to hold capital.
Banks, by contrast, are fatly capitalised. Well, they would be, if there were such a term in common usage, at least as long as regulators remember not to go soft (periodically, they forget) and weaken capitalisation regulations.