When it comes to the financial sector, understanding the underlying impact of bank balance sheets and key performance indicators (KPIs) can be a daunting task. However, one common indicator is always subject to directly affecting the way a bank makes money on the bottom line, and that is the capital requirement set by government regulators.
Investors need to understand that the more capital a bank must have on hand to comply with regulations, the more stringent the rules are regarding the amount of lending products, such as mortgages and credit cards, that the underlying bank can undertake. The opposite is true when these capital requirements are reduced; the bank can conduct more business with significantly less capital on hand, essentially a significant leveraging factor for shareholders to enjoy.
