Capital Adequacy Essay
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 …show more content…
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