Question

a. Why Banks are regulated & supervised?
b. What financial ratios best capture each aspects of the CAMELS Ratings?
c. What is KYC? Why KYC is important in banking operations? (3mark)
d. What are the impacts of money laundering on the economy?
e. Would increased regulatory capital requirements lead to more consolidation among banks?(3marks)
f. What are the consequences of bank failure
g. Bank of Ghana requires Banks to maintain a statutory capital adequacy ratio (CAR) of 10%.
Why strong CAR is so important for Banks and what are the mandatory provisions for Banks with less than 10% CAR?

Answer 1

a) Need for supervision and regulation of banks

Bank regulation ia form of the government regulation which requires the banks to certain compliances and requirements, procedures and guidelines, purplos is to maintain fair working and transparency in the market between the banking institutions and the individuals and the big corporations with whom they conduct businesses.

Another important rationals for regulation of banks is to address the concerns of the stability and safety of the public funds involved, the capital adequacy norms ensure thst the banks donot become too much exposed..

The government stands in fiduciary relation with the nation and the citizens hence it has formal obligationto protect its consumers across the industries, hence to promote fair access to credit the regualation and supervision of banks is mandatory for every economy.

b) Financial ratios addressing the aspects of CAMELS rating:

The CAMELS rating system is an international rating system that is used by the supervisory authorities of the banks in order to rate the financial institutions according to the 6 factors represented by the acronym CAMELS.

The acronym CAMELS stands for:Capital adequacy, Assets quality, Management, Earnings, Liquidity and senstivity.

The financial ratios which address th aspects of CAMELS rating include the capital adequacy ratio through the capital trend analysis ie risk based net worth requirement.Higher the better is considered.

Asset quality is measured by rating the investment risk factor to the company 's capital earnings.

To assess a company's liquidity we have to evaluate the risk sensitivy, availibility of assets which can be easily converted into cash and the short term volatile financial resources.

c) WHAT IS KYC AND IMPORTANCE OF KYC in banking operations:

KYC ie Know your customer is the process wherein a business identifies and verifies the identity and authnticity of its clients, it enables the business to obtain confidence regarding the genuiness of its customers, it helps them to understand its customers better , their financial stability and dealings, and thus helps the business to manage its risk prudently.

Importance of KYC in banking operations:

The main purpose of introducing KYC norms as mandatory in banks is to prevent the banks from being misused by the criminal elements for the malafide objectives of money laundering and related activities. It helps the banks to better understand their customers andmanage their financial dealings and hence manage their risks prudently.

d) Impacts of money laundering on the economy:

Amongst other negative socio economic effects of money laundering, the most malafide is the transfer of economic powers from the market, government and citizens to the criminals, it strengthens theit powers and thus adversely effects the growth of the economy.

Also it promotes unnecessary inflationary conditions in the economy and leads to stagnation of the economic development of the economy and sometimes takes it in downward directio.