What is Impaired Capital
BREAKING DOWN Impaired Capital
Similar to the impairment of an asset, a company's capital can also become impaired. Impaired capital is a situation impacting a company’s balance sheet when stockholders’ equity is worth less than the par value of the stock. Impaired capital occurs when a firm has experienced losses and the retained-earnings amount is negative, also called a retained deficit. However, unlike the impairment of an asset, impaired capital can naturally reverse when a company's total capital increases back above the par value of its capital stock.
With respect to a bank or trust company's capital accounts, impaired capital means that charges or losses have been sufficient to eliminate all their allowance for loan and lease loss, undivided profits, surplus fund and any other capital reserves and have brought the book amount of the capital stock below the par value of the capital stock. In a situation where severe impaired capital has resulted from excessive loan losses and other flawed practices, a bank or trust company will be called upon by regulatory agencies to make up the deficiency by raising new capital, usually within 90 days from notice or go into liquidation. One option for making up the deficiency is for the board of directors to levy an assessment on the common stockholders sufficient to restore the capital stock. If stockholders do not pay the assessments within a specified time frame, the board of directors can choose to sell enough of the stockholder's shares to collect the assessment.