For the resilience of a bank in the face of losses on its loan book, capital is the crucial criterion. The more capital a bank has, the more it is able to absorb losses. However, the larger a bank’s book of loans relative to its capital, the higher the rate of return it will be able to offer investors. That was the point of the elaborate legal structures designed to hold securitized assets off balance sheet, to minimize the capital invested and to maximize its leverage. Capital ratios were, therefore, one of the neuralgic points of bank governance.
