Even if the business condition of banks deteriorates and losses expand, the financial intermediary function of banks will not be harmed as long as losses can be sufficiently absorbed by capital. In other words, capital serves as a buffer in the financial intermediary function.
If, however, the ratio of losses to capital exceeds a certain critical point, there is a possibility that the financial intermediary function will become significantly impaired; in other words, the relationship between the scale of capital and the financial intermediary function is nonlinear. This was observed after the economic bubble burst in Japan.