Acfi 2005 - Capital Adequacy Project

Name gobind shergill

Group 2A

Id no C3084433

ACFI2005: Capital Adequacy Project

Introduction:

There is a close relation between the capital adequacy and the financial system but it is important to have an overview before get to the more detailed study of what is going on in the financial system.

There is a constant flow of cash and funds through the financial system due to the financial institutions as they assist money movement among the borrowers and lenders (lecture notes, chapter 8, 9, 15) a financial institution is basically a firm like a bank which acts as a safe house for depositors to keep their money and also provide loan with interest to others and this how they expand the institution. This is the basic concept of the way the economics works in a country and also how a bank functions. All the banks are connected to one another and if there is a problem in one of the banks the bank looses it image in the minds of the people and if it’s a big problem it can cause disaster within the financial system of the country and this can only be caused due to shortage of liquid cash. To have a proficient system the bank has to be sure to be liquid to avoid any problems. (Chapter 1) To help avoid this problem the government lays down regulations for the banks through prudential supervision (Chapter 2). The Australian regulatory power is Australian Prudential Regulation Authority (APRA), whereas in Singapore it is Monetary Authority of Singapore (MAS). The key concept of their job is to assure the people that their money is in safe hands. Keeping the capital safe is essential as it assists the bank to expand and help them pay off any debts when needed (Chapter 2). In context to if there is an emergency as the government has some control on the banks it asks them to keep some money on the side. (http://moneyterms.co.uk/capital-adequacy/) This is called Capital Adequacy.

Information Source:

PowerPoint lecture 1, slide 8, 9 and 11 and lecture 2, slide 15, 29, 32.

Textbook Page 6,7

References:

Christopher V, 2007. �Financial Institutions, Instruments and Markets’, Australia: McGraw Hill Australia Pty Ltd.

United Kingdom Money term – Capital Adequacy 2008: British, Money Terms Home, http://moneyterms.co.uk/capital-adequacy/

Change in Regulations in Australia’s Capital Adequacy in the past 20 years

First I will briefly talk about Basel one capital accord this would enable us to understand how the banking system works then we can go ahead to talk about the change in the past 20 years.

Introduction on Basel One

G 10, Switzerland and Luxembourg together due to the changes caused buy deregulations, globalization and the rise of efficient machinery close to 1974 lay down the foundation of Basel committee to make stronger the weakening global financial system. After meeting on a number of occasions the came up with the Basel One Accord keeping the internationally diversified banks in mind according to them a bank should be under the regulatory power of the country it belongs to. It assists bank make sure that they have enough capital but it does not succeed to account for the diversity, and sophistication of the financial market. (Page 73 and 74 of the textbook)

Insight into Basel One System

The three basic elements of Basel one are capital, risk weight, and target standard ratio.

To start with the capital first there are two types of capitals core capital and supplementary capital core capital is funds also known as liquid cash which the bank can disclose to everybody. While supplementary capital is funds which can not be disclosed to others like the revaluation reserves. As we go on to the next element the risk weight as described before has five different groups that is 0%, 10%, 20%, 50% and 100%.

This would allow the bank to know what risk they are taking.

The most essential rule is the target standard ratio the present ratio is 8% which is made up of 4% of core capital and 4% of supplementary capital the working group also feels that the countries will need time to execute the plans, so after 1992 all countries has to hit the target (Basle, 1988)