Capital adequacy in commercial banks
The subject of bank capital adequacy has been attracting attention for a long time. But recently, the failure of several large commercial banks and the continued decline in bank capital have substantially increased the interest in this subject.^ The task of intermediating between a nation's lenders and borrowers has historically been best handled by banks. Responsibility for this complex task has placed banks in a position where the soundness of the industry and the public's confidence in banking institutions have been matters of public interest. This clearly sets banking apart from other industries.^ Since banking has a pivotal role in the functioning of the economy, and since public confidence is a major factor in the efficient operation of the banking industry this industry has been and continues to be publicly regulated and closely supervised. Because of the integral association of capital with bank soundness, one of the main tools of regulators is the periodic evaluation of the adequacy of bank capital. This complex and demanding task relies heavily on subjective elements. Disagreement between bankers and regulators over the judgmental aspects of evaluating bank capital adequacy has led to a protracted controversy.^ The bank capital debate is actually two separate controversies: should capital be regulated, and, if so, how much is adequate? On the first point, many bankers argue that there are market forces that monitor bank behavior, including the level of the bank's capital, and prevent a deterioration in this important account. Alternatively, regulators feel that the discipline of the market is not sufficient to evaluate and influence the capital level in the banking industry. The second issue, how much capital is adequate, is the subject of even stronger disagreement. Typically, bankers complain they are needlessly over capitalized, while regulators try to halt the long-running decline in capitalization. As a result, in December 1981, the three federal banking agencies announced minimum primary capital ratios for the banking organizations that they regulate.^ The empirical results provide support for the conclusion that the current capital guidelines do have influence on the equity capital positions of commercial banks. ^
Jones, Imeh A, "Capital adequacy in commercial banks" (1988). ETD Collection for Fordham University. AAI8809475.