A Legal Definition of Capital
A Legal Definition of Capital
The word capital most typically refers to the GAAP definition of equity (which is the amount that an organization's assets exceed its liabilities). Other contexts though might use the word in a manner with a different meaning. The following excerpt provides a discussion of the various possible meanings of capital depending on the context in the USA.
"Meaning of 'Capital'
'Capital,' as applied to a business enterprise, can have at least five different meanings. First, it can refer to plant, equipment, and other long-lived physical assets that the firm can use to produce more goods. Macroeconomists often use the term in this sense. Second, 'capital' can refer to all the money or other property that the firm owns or uses. In this sense, a firm's 'capital' approximates (and with the inclusion of leased property used by the firm, may even exceed) the firm's total assets. Third, 'capital' can refer to the money or other value that the firm received for issuing stock to the firm's owners (the par value of the stock plus any paid-in surplus; henceforth, for brevity, 'paid-in capital'). Fourth, 'capital' can refer to the firm's legal capital for purposes of corporate law: the amount of equity not available for paying dividends (par value of stock). Fifth, 'capital' can refer to the amount by which the firm's total assets exceed the firm's total liabilities - the amount also known as 'equity' or 'net worth.'
These different definitions can yield very different results. Consider the following balance sheet:
BALANCE SHEET OF FIRST BANK
(in millions of dollars)
ASSETS
Cash $ 5
Securities 15
Loans 77
Building &
equipment 3
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Total assets 100
LIABILITIES & EQUITY
Deposits $88
Common Stock at par value 1
Paid-in surplus 4
Retained earnings 7
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Total liabilities & equity 100
How much 'capital' does First Bank have? The answer depends on which definition applies. The bank's capital is $3 million under the first definition (productive physical assets), $100 million under the second definition (total assets), $5 million under the third definition (paid-in capital), $1 million under the fourth definition (legal capital), and $12 million under the fifth definition (net worth). All of which underscores the need to remain alert to the different meanings of 'capital'."
. . .
[To conclude,] capital generally means total assets minus total liabilities . . . Note [that some statutes] do not use the term consistently [and refer to a variation of the term.] For example, in various provisions of the National Bank Act and Federal Reserve Act referring to a bank's 'unimpaired capital and unimpaired surplus' (e.g., id. §§ 84, 375b), 'capital' means legal capital (par value), 'surplus' means retained earnings (traditionally known as 'earned surplus') plus paid-in surplus, and 'unimpaired means net of any losses. (Thus, if a bank begins operations with $10 million in legal capital and must shortly thereafter recognize $2 million in losses, the bank's 'unimpaired capital' falls to $8 million.) See generally 12 CFR § 3.100 (OCC interpretation harmonizing capital-related statutory terminology)."
Macey, Miller, Carnell, Banking Law and Regulation, Third Edition, at pp 276-277 (Aspen Publishers 2001) (providing a simple synopsis of the legal history of banking regulation in the U.S.A.).
Sources of capital include bank loans and capital markets financing.
See Equity, The Securities Act of 1933, The Exchange Act of 1934, The Trust Indenture Act of 1939, The Investment Advisers Act of 1940, The Investment Company Act of 1940, and Regulations S-K and S-X. See also Other Federal Securities Laws and Rules.
See also Bookkeeping, Financial Statements, Reg. S-X, Revenue, Total Enterprise Value, Book Value, Distinguishing Revenue and Free Cash Flow, Distinguishing Revenue and FFO, Capital - Securities, Securities Exchanges, History of Banking Regulation, and Anti-trust Compliance Measures.