There are a number of different ways Capital can be defined and it should be noted that the standard accounting definition of ‘capital’ is not the same as the one used for regulatory capital purposes.
In essence, the difference is that Regulatory Capital is more conservative than accounting capital.
For example, for prudential requirement purposes, capital is not obtained by simply deducting the value of a firm’s liabilities from its assets. Instead, it is only the capital that is freely available to absorb losses at all times that qualifies as regulatory capital.
In addition, the measure of this capital is further moderated by taking into account factors such as:
not recognising gains that have not yet been realised; and
by deducting assets that may not have a stable value in stressed market conditions.