Question

Regulations (Basel II and III) require banks to have a total capital of 8 percent. Do you think this is too low? Too high? Just right? Discuss.

Answer 1

Regulations (Basel II, and, III) - the Total capital of 8 percent

As per Basel III norms in 2017, bank's tier II, and, tier I capital must be at least 8% of the risk-weighted assets. The measure of the amount of a bank's capital, in relation to its credit exposures. These are expressed as a percentage. The bank's capital is 8 percent of the size of its credit exposures. Credit, and, capital exposures are measured, and, defined in a specific manner.

• tier one capital to total risk-weighted credit exposures cannot be less than 4 percent
• total capital to total risk-weighted credit exposures to not less than 8 percent

Too low, too high, just right

• Higher ratios will reduce banks' need for costly Government bailouts, and, need to tighten credit standards
• Cost of a crisis is not changed by higher bank capital bank ratios
• Higher ratios can lead to higher costs for banks
• Funding costs depend on the difference between required rates of return on debt, and, equity
• Higher funding costs impact GDP; banks pass on the funding costs to borrowers

Capital adequacy ratio improves the ability to absorb shocks arising from economic, and, financial stress