What constitutes primary capital for banks?

Primary capital for banks primarily consists of funds that can absorb losses and support ongoing operations, thereby ensuring financial stability. This is typically comprised of capital obtained through issuing common or preferred stock as well as retained earnings.

When banks issue common or preferred stock, they are raising equity capital that can provide a buffer against losses. Retained earnings, which are profits that have been reinvested in the bank rather than distributed as dividends, also contribute to this core capital base. This equity base is crucial for maintaining regulatory capital ratios, which are key indicators of a bank's financial health.

The other options do not qualify as primary capital. Government grants and subsidies provide support but do not reflect ownership or risk-sharing like stock issues do. Investments in foreign securities represent assets but do not increase the capital base. Similarly, borrowing from other banks increases liabilities rather than equity, and therefore does not constitute primary capital.