Capital Adequacy Essay

1956 words - 8 pages

Capital Adequacy

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/

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