QUESTION1 It is very essential for the banks to have proper capital balance. The banks should have optimal capital structure. For this reason, the banks always try to keep the proper capital balance. The adequacy of proper capital balance is very necessary in preventing the banks to be failure. In other words, it can be said that the proper capital structure makes sure the possible return to the equity stakeholders(Posner, 2015). The capital structure plays an important role in the better performance of the company. In the case when bankisfalling shortoffulfilling the capital balanceby one million dollars, then there are three significant tools to rectify this critical situation. First, the leverage ratio is significant tool to maintain capital balance by the banks. The leverage ratio assesses the capital of banks to the asset. This ratio is used by the central authorities to make sure the capital adequacy of bank. This tool is useful to place restrictions on a level where the bank may leverage the capital balance. Further, second significant tool is debt equity ratio. This tool is useful in deciding the correct combination of debt and equity, considered by shareholders or individuals, in respect of the capacity of bank to continue and the debt’s influence on the financial position of company. Moreover, other significant tool is earning ratio. With the help of earning ratio, the comparison can be made with similar banks in the similar industry (Chernykh & Cole, 2015).
QUESTION2 References Chernykh, L., & Cole, R. A. (2015). How should we measure bank capital adequacy for triggering Prompt Corrective Action? A (simple) proposal.Journal of Financial Stability,20, 131-143. Posner, E. A. (2015). How do bank regulators determine capital-adequacy requirements.U. Chi. L. Rev.,82, 1853.