What does "equity" represent in a bank's balance sheet?

In the context of a bank's balance sheet, "equity" represents the residual interest in the assets of the bank after deducting its liabilities. This means that equity reflects what is owned by the shareholders after all debts and obligations have been settled. It captures the net worth of the bank, which is essential for assessing the institution's financial health.

Understanding equity in this way highlights its role as a cushion against losses—if a bank's assets decrease in value or if the bank faces losses, equity represents the first line of coverage for creditors. It provides a measure of the owners' claim on the bank's resources, allowing stakeholders to evaluate the effectiveness of management in generating returns for shareholders.

The other options, while relevant to the broader financial picture, do not accurately define equity. Total assets, for instance, encompass everything the bank owns, and total liabilities capture all obligations. Capital invested by shareholders is a part of equity but does not fully encapsulate its meaning, as equity also includes retained earnings and other comprehensive income that can have significant impacts on the bank's net assets.