Capital, by definition, is the lifeblood of a bank. No capital, no bank. It is as simple as that. I have written several times in the past about the capital requirements for banks and the current focus on “risk-based” capital, that is, the more risky the asset of the bank, the more the capital that the bank must maintain against it. For example, cash is not risky, corporate loans can be very risky.
As one way of addressing some of the problems that may have led to the international economic crisis of the last year, and in an attempt to forestall such a free fall again, there is an effort being undertaken on a global basis by banking regulators to explore ways of strengthening the permanent capital standards for banks. This process will take months, if not years, to accomplish, and there of course is no guarantee that there may not be another collapse in the future. However, these measures should at least build into the prudential supervisory process more trigger points when regulators must stop and assess a particular bank’s condition and, if necessary, require remedial actions to be taken before a crisis occurs.
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