Question

6.         One of the tasks capital performs is regulator of growth. This means:

1. Geographic and portfolio diversification.
2. Growth and development of new services.
3. The regulator could limit a financial institution from expanding its loans and deposits too fast, or from acquiring other institutions if the financial institution is deemed to be undercapitalized.
4. All of the above.

Answer 1

A new institution needs start up funding to acquire land, build or lease facilities, purchase equipment and hire staff. Capital provides these funds, needed to organize and operate before others sources of funds come flowing in.

Capital provides funds for the organization's growth and the development of new services and facilities. Most financial service providers eventually outgrow the facilities they start with. An infusion of additional capital will help the financial firm to expand into larger quarters or build additional branch offices in order to keep pace with its expanding market and follow its customers. Thereby helping in growth & development of new services and geographic & portfolio diversification.

Both regulatory authorities and financial markets require that capital increases in line with growth of risky assets. Thus, the cushion to absorb losses has to increase with the financial institution's growing risk exposure. An institution that expands its loans and deposits too fast will start receiving signals from the market and regulators that its growth must be slowed or additional capital must be added.

Hence, the regulator could limit a financial institution from expanding its loans and deposits too fast, or from acquiring other institutions if the financial institution is deemed to be undercapitalized.

Based on above, answer to question is all of the above.