Capital Adequacy, Leverage, and Debt Equity Ratios for Banks

This assignment explores the critical concept of bank capital adequacy, emphasizing its significance in maintaining financial stability and preventing bank failures. The solution delves into three key tools: leverage ratio, debt-equity ratio, and earning ratio. The leverage ratio, used by regulatory bodies, assesses a bank's capital against its assets. The debt-equity ratio helps determine the optimal mix of debt and equity, considering the bank's ability to continue operations. Furthermore, the earning ratio facilitates comparison with similar banks in the industry. The assignment highlights the importance of maintaining proper capital balance to ensure shareholder returns and overall company performance, referencing relevant academic sources.

Running head: QUESTION 0
economics
MARCH 8, 2019
STUDENT DETAILS:

QUESTION 1
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 bank is falling
short of fulfilling the capital balance by 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).

QUESTION 2
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.