When banks have higher capital ratios, what occurs with potential losses?

When banks maintain higher capital ratios, they are effectively strengthening their balance sheets by having a greater buffer of equity compared to their risk-weighted assets. This additional capital serves to absorb potential losses that may arise from their lending activities or investment portfolios. In essence, a higher capital ratio means that the bank has more financial resources available to cover any unexpected downturns in asset values or increases in default rates. This enhanced capacity to absorb losses contributes to the overall stability and resilience of the bank, allowing it to operate more securely, even in challenging economic conditions.

The other choices do not accurately capture the relationship between capital ratios and loss absorption. Issuing more stocks or experiencing increased regulatory scrutiny are responses that could happen under different circumstances but do not directly relate to the ability to absorb losses. Offering lower interest rates on loans could occur as a result of a stronger financial position but is not a fundamental aspect of what higher capital ratios imply concerning potential loss absorption.