Thin capitalisation: Difference between revisions
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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 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. | ||
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[[Asset manager]]s also tend to be (comparatively) thinly capitalised (but nothing like as thinly as {{tag|SPV}}s do, as they generally act for the account of the [[fund]]s that they manage, and aren't subject to any regulatory requirements to hold capital. | [[Asset manager]]s also tend to be (comparatively) thinly capitalised (but nothing like as thinly as {{tag|SPV}}s do, as they generally act for the account of the [[fund]]s that they manage, and aren't subject to any regulatory requirements to hold capital. | ||
[[Bank]]s, by contrast, are [[fat capitalisation|fatly capitalised]]. Well, they would be, if there were such a term in common usage. | [[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. | ||
{{Seealso}} | {{Seealso}} | ||
Revision as of 20:45, 28 August 2017
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Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works. {{{2}}}
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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.