Capital adequacy is defined as the percentage of a financial institution's principal capital to its assets, used as a measure of its financial strength and stability. According to the capital adequacy standard set by the Bank for International Settlements, a bank must hold at least 8% of its assets. When it comes to examining the bank's capital position, two important factors need to be examined: the bank's capital and the bank's balance sheet. Bank capital is defined as the storage of cash and assets held by the bank and needed to protect its creditors in the event of liquidation of bank assets. The bank's capital is measured by its financial health. Capital may also be referred to as the bank's own funds, such as deposits. The bank's equity includes its ordinary share capital and its retained earnings. The function of capital banking is to bear banking risk, thereby protecting depositors of individual banks against banks and guaranteeing the banking system as a whole against bank runs. In other words, a bank's balance sheet provides the financial position of the bank. The bank's balance sheet shows on one side the sources of funds called liabilities and capital, while the other side of the bank's balance sheet shows the use of funds called assets. Furthermore, to know the size of a bank's balance sheet, the leverage ratio is used. The leverage ratio corresponds to the future losses to which a bank is potentially exposed, in relation to its own capital. Based on regulatory requirements, as a capital to total assets ratio, it reflects a bank's risk, as it absorbs losses from the bank's assets. High leverage ratio (which is low... middle of paper ... what the bank does, the risks it takes, and how those risks should be reduced. Reference: http://lexicon.ft. com/Term ?term=bank-capital – line 1 to line 3 Reference: http://www.businessdictionary.com/definition/capital-adequacy.html - line 1 to line 6 Reference: http://education-portal.com/ academy/lesson /loanable-funds-definition-theory-quiz.html#lesson – line 1 & 2Reference: http://www.macrobasics.com/graphs/lfm/description - lines 1 & 2, line 8.Reference: http https:/ /www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDsQFjAD&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2FDocuments%2F quarterlybulletin%2F2013%2Fqb130302 . pdf&ei=wmozU-DFJaeAiQee84HYCA&usg=AFQjCNFelgALWKvNA-gqvPbSTSFB6sBgmQPg 204 – Capital (section) – lines 3 to 6Pg 205 – the leverage ratio (section) – lines 1 to 17Pg 202 – presentation of the balance sheet of a bank (section) – line 3 to 7