Capital has both general and specific meanings that could be broadly summarized as 'investable money'. First identified by Karl Marx as money transformed by production into more money through investment in the capital markets or individual enterprise as venture capital, it is today more strictly defined by bodies regulating banking institutions, modern capital's main custodians.
Marx to markets
Capital was first identified as the main driver of the modern system of economic growth by German-born economist and philosopher Karl Marx in his classic 1865 political-economy treatise "Das Kapital". In the book's fourth chapter, entitled: The General Formula for Capital, Marx introduces the now-accepted idea of the accumulation of capital through investment as a never-ending cycle under 'capitalism' by showing how societies had progressed from using money as a means to buy commodities to using money to produce commodities as a means to increase value. Today most such value-producing capital is held by retail banks, investment banks and other institutional investors who manage capital on behalf of investors. Such capital was previously subject to strict definition and regulation only at the retail-banking level, but similar restrictions have recently been expanded to the investment-bank level.
Kinds of capital
The standard accounting view of business capital focuses on the claims side of the balance sheet that represent sources of funding, such as shareholders' equity and paid-in earnings. But regulators of financial insitutions like the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Bank of International Settlements (BIS) also take account of risk factors associated with different kinds of capital assets. Regulators assign different 'tiers' to bank assets when deciding what percentage of total assets must be held as required liquid capital, also called regulatory capital, at each tier. Such capital ratios are generally around 10 percent.
The Swiss-based BIS several years ago enacted the so-called Basel II accord that revised its supervisory regulations governing all global banks, which domestic regulators generally base their measurements on. However, its strict guidelines have been criticized as rigid and out-of-touch with shareholder expectations by advocates of measuring 'economic capital', which focuses on risk from the point of view of the risk bearer.
- Das Kapital. Marxists.org.
- Chapter 4: The General Formula for Capital. Sparksnotes.com.
- What Is “Economic Capital?” - A Quick Guide to the Differences between Economic Capital and Regulatory Capital. Riskcenter.com.
- Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework. Bank of International Settlements.
- ibid.. Riskcenter.com.