Question

Banks are subject to capital requirements, which force them to maintain a minimum amount of capital (or equity) as a percentage of total assets. How do banks satisfy regulatory requirements?

Answer 1

Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percentage of risk- weighted assets. Basel 1 is the first of three sets of regulations known individually as Basel l,ll and lll and together as the Basel accords.

According to Basel l,banks are required to keep capital of at least 8% of their determined risk profile on hand.

The BCBS was founded in 1974 as an international form where members could co-operate on banking supervision matters.

The BCBS aims to enhance "financial stability by improving supervisory know- how and the quality of banking supervision worldwide".

Members are responsible for their implementation in their home countries. Basel l is originally called for the minimum capital ratio of capital to risk- weighted assets of 8% to be implemented by the end of 1992.

Regulatory requirements-

-Capital requirements are regulatory standards for banks that determine how much liquid capital they must keep on hand, concerning their overall holdings.

-In the U.S. adequately capitalised banks have a tier 1 capital to risk- weighted assets ratio of at least 4%.

- Banks publicly disclose financial and other information and depositors and other creditors are able to use this information to assess the level of risk and to make investment decisions. This is regulatory requirement.