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Essay / Research Paper Abstract
This 4page paper looks at current issues concerning capital adequacy within the banking sector. The paper briefly discusses a range of issues, including the way the capital adequacy is calculated, the impact that capital adequacy has on optimum bank equity allocation, under and overinvestment and the impact of risk assessment on assets and loan portfolios. The bibliography cites Dick sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEcapadeq.rtf
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Unformatted sample text from the term paper:
of International Settlements (Howells and Bain, 2003). The basic premise of capital adequacy is the ability of the bank to support its operations and is measured as the ratio of
its capital against its assets (assets are income producing tools such as loans) (Howells and Bain, 2003). The way in which capital adequacy is viewed today is subject to different
interpretations concerning the future needs of the banking industry. Within the last month (September, 2007) a UK bank; Northern Rock, has indicated the importance of capital adequacy. Northern Rock
has struggled since the summer of 2007 due the difficulties in the money market making it harder to borrow funds for day-to-day operations. In the long term the bank was
not facing any difficulties; there are more than sufficient assets to cover all liabilities. The difficulty was the make-up of the assets; a high level of the funds was tied
up in long-term mortgages and loans (BBC, 2007). The capital base of the bank has been charged by the relevant regulator; the financial services authority, as being sound. However, the
bank requires funds to run on a day-to-day basis. In the case of Northern Rock the inability to borrow funds due to the credit crunch in the money markets have
left it vulnerable (BBC, 2007). The issue has been resolved with an emergency loan from the Bank of England. Whilst not directly related to issues of capital adequacy, this does
raise questions about the way in which capital adequacy is judged, the way in which it is used in the day-to-day running of the bank. It is a useful consideration
when looking at capital adequacy and remember the case of Northern Rock, which was judged as solvent, but face liquidity problems. Banks had an interesting relationship with their customers and
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