Explanation:

It is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. As credit creation (i.e. loan disbursals) of banks is highly risky business, the depositors’ money depends on the banks’ quality of lending. If the bank funding goes largely in risky projects such as infrastructure, chances of bank insolvency is high. Having adequate bank capital (compared to liabilities) helps to prevent bank failure, which arises in case the bank cannot satisfy its obligations to pay the depositors and other creditors. It is also a part of the overall Basel norms. Since the whole payment system, public as well as private, depends on banks, safeguarding banks is crucial to sound economic health.