The first rule of bank capital is that banks need to be solvent. Traditionally banks make a living by borrowing a lot of short-term money (deposits, etc.) and investing it in long-term assets (loans, etc.). If the bank owes depositors $100 and only has $95 worth of assets, that is bad, in a fairly straightforward way. You do not want that to happen.
But the long-term assets can lose value: If you have a bank with $100 of assets and $99 of liabilities, and the assets lose 2% of their value, then the bank becomes insolvent. The way to prevent this is to require that banks have a certain amount of equity capital: You write a rule like “a bank with $100 of assets can only have $92 of liabilities,” requiring the rest of the assets to be funded with equity. Then if the assets lose 8% of their value, the bank will still be solvent; it will still have enough assets ($92) to pay off its depositors.
