8. Explain capital reserves and the common purposes for capital reserves. Capital reserves are segregations of retained earnings, which are reported in the Shareholders' Equity section of the balance sheet. Banks may establish capital reserves for the following reasons: a. Undeclared cash or stock dividends; b. Retirement accounts for limited-life preferred stock or subordinated notes and debentures; or c. Contingencies, where the bank would include amounts set aside for possible unforeseen or indeterminate losses or liabilities not otherwise accrued as a liability on the books and not covered by insurance.