Determining Capital Adequacy

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Capital Adequacy is defined as the percentage ration of a financial institution’s primary capital to its assets which is used as a measure of its financial strength and stability. According to the capital adequacy standard set by the Bank for International Settlements, a bank must have at least 8% of their assets. In terms of examining the bank’s capital positions, there are two important factors that should be examined which is the bank’s capital and the bank’s balance sheet. The bank capital is defined as the storage of cash and assets which is hold by the bank and is needed to access to protect their creditors if the bank assets are liquidated. The capital of the bank is measure by its financial health. Capital can also be known as the bank’s own funds such as deposits. The bank’s own fund includes its ordinary share capital and retained earnings. The functions of the capital bank is bearing the risk of banking, thus protecting the depositors of individual banks against banks, and guaranteeing the banking system as a whole against bank panics. In other words, a bank’s balance sheet provides the bank’s financial position. The bank’s balance sheet on one side indicates the sources of funds which is known as liabilities and capital while the other side of the bank’s balance sheet indicates the use of funds which is known as assets. Moreover, in terms of knowing the size of a bank’s balance sheet, the leverage ratio is used. The leverage ratio is the future losses that a bank is possibly exposed to, relative to its own capital. Based on regulatory requirement, as the ratio of capital towards total assets, it reflect upon the riskiness of a bank, since it absorbs the losses of the asset of the bank. High leverage ratio (which is low... ... middle of paper ... ...t the bank does, the risks they undertake, and how those risk should be reduced. Reference: http://lexicon.ft.com/Term?term=bank-capital – line 1 to line 3 Reference: http://www.businessdictionary.com/definition/capital-adequacy.html - line 1 to line 6 Reference: http://education-portal.com/academy/lesson/loanable-funds-definition-theory-quiz.html#lesson – line 1 & 2 Reference: http://www.macrobasics.com/graphs/lfm/description - line 1 & 2, line 8. Reference: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDsQFjAD&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2FDocuments%2Fquarterlybulletin%2F2013%2Fqb130302.pdf&ei=wmozU-DFJaeAiQee84HYCA&usg=AFQjCNFelgALWKvNA-gqvPbSTSFB6sBgmQ Pg 204 – Capital(heading) – line 3 to 6 Pg 205 – the leverage ratio(heading) – line 1 to 17 Pg 202 – introducing a bank’s balance sheet(heading) – line 3 to 7

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