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Regulators have traditionally required banks to maintain capital-asset ratios of a certain level to ensure adequate...

Regulators have traditionally required banks to maintain capital-asset ratios of a certain level to ensure adequate net worth based on the size and composition of the bank’s assets on its balance sheet. Why might such capital adequacy requirements not be effective?

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Capital adequacy ratio are required by the regulators in order to maintain certain capital in relation with the Assets of the bank so that they will be able to survive and sustain through various economic downturns but these capital adequacy requirements are not completely helpful because there are various shortcomings associated with this capital adequacy requirements as the balance sheet of a company is valued on the historical cost and this will be not adjusting the change in the market value of various loans and it can be said that it would be causing a risk for the company in the long run as the company will not be adjusting for any inflation and market value so these assets can not reflect the true value of the body owner of the company.

At the time of the financial crisis these ratios are not quickly reflecting the changes which are happening to the value of the Assets and the quality of the assets turning bad so they will be not expecting for any futuristic change in the valuations and no protection for the banks against such adverse economic scenario if there is no predictability available in respect to the asset values so can be said that capital adequacy norms are sometime flawed and they are not effective

jeff jeffy answered 1 year ago
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