Capital adequacy is defined as the percentage ratio of a financial institution's primary 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 own at least 8% of its assets. In terms of examining the bank's capital positions, there are two important factors that should 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 is needed to access it to protect creditors in the event of liquidation of bank assets. The bank's capital is measured by its financial health. Capital may also be known as the bank's own funds, such as deposits. The bank's own fund includes ordinary share capital and retained earnings. The function of the capital bank is to bear the banking risk, thus protecting the depositors of individual banks from the banks and guaranteeing the banking system as a whole from banking panic. In other words, a bank's balance sheet provides the financial position of the bank. The bank's balance sheet on one side indicates the sources of funds known as liabilities and capital, while the other side of the bank's balance sheet indicates the use of funds known as assets. Furthermore, to know the size of a bank's balance sheet, the leverage ratio is used. The leverage ratio represents the future losses to which a bank is possibly exposed, compared to its capital. Based on regulatory requirements, as a ratio of capital to total assets, it reflects the riskiness of a bank, as it absorbs losses in 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 – from line 1 to line 3Reference: http://www.businessdictionary.com/definition/capital-adequacy.html - from line 1 to line 6Reference: http://education-portal.com/ academy /lesson/loanable-funds-definition-theory-quiz.html#lesson – line 1 and 2Reference: http://www.macrobasics.com/graphs/lfm/description - line 1 and 2, line 8.Reference: http: //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%2Fquarterly bulletin%2F2013%2Fqb130302 .pdf&ei=wmozU-DFJaeAiQee84HYCA&usg=AFQjCNFelgALWKvNA-gqvPbSTSFB6sBgmQPg 204 – Capital (heading) – line from 3 to 6Pg 205 – leverage ratio (heading) – line from 1 to 17Pg 202 – introduction of the balance sheet (heading) of a bank – line 3 a 7