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Risk-Based Capital Adequacy of Australian Banks

Author

Listed:
  • Warren P. Hogan

    (Department of Economics, University of Sydney.)

  • Ian G. Sharpe

    (School of Banking and Finance, University of New South Wales, Kensington.)

Abstract

This paper analyses the capital adequacy provisions introduced by the Reserve Bank of Australia from September, 1988 and examines its initial application to three major Australian banks. This risk-adjusted capital adequacy ratio is partial in its coverage and thus a misleading measure of total bank risk. As well, it may distort the allocation of credit. An alternative approach based on option pricing theory is considered.

Suggested Citation

  • Warren P. Hogan & Ian G. Sharpe, 1990. "Risk-Based Capital Adequacy of Australian Banks," Australian Journal of Management, Australian School of Business, vol. 15(1), pages 177-201, June.
    • Handle: RePEc:sae:ausman:v:15:y:1990:i:1:p:177-201
    DOI: 10.1177/031289629001500108
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    References listed on IDEAS

    as
    1. Gross, E & Hogan, Warren P & Sharpe, Ian G, 1988. "Market Information and Potential Insolvency of Australian Financial Institutions," Australian Economic Papers, Wiley Blackwell, vol. 27(50), pages 44-64, June.
    2. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
    3. repec:bla:jfinan:v:43:y:1988:i:5:p:1219-33 is not listed on IDEAS
    4. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
    5. Pyle, David H., 1986. "Capital regulation and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 189-201, June.
    6. Brickley, James A. & James, Christopher M., 1986. "Access to deposit insurance, insolvency rules and the stock returns of financial institutions," Journal of Financial Economics, Elsevier, vol. 16(3), pages 345-371, July.
    7. Alex Cukierman, 1986. "Central bank behavior and credibility: some recent theoretical developments," Review, Federal Reserve Bank of St. Louis, issue May, pages 5-17.
    8. Ronn, Ehud I & Verma, Avinash K, 1986. "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-895, September.
    9. W. F. Sharpe, 1981. "Bank Capital Adequacy, Deposit Insurance, and Security Values," NBER Chapters, in: Risk and Capital Adequacy in Commercial Banks, pages 187-202, National Bureau of Economic Research, Inc.
    10. Ronn, Ehud I. & Verma, Avinash K., 1989. "Risk-based capital adequacy standards for a sample of 43 major banks," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 21-29, March.
    11. Portes,, 1987. "Threats to International Financial Stability," Cambridge Books, Cambridge University Press, number 9780521347891, October.
    12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    13. Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 446-460, November.
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    Citations

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    Cited by:

    1. Andrew Greinke, 2005. "Imposing Capital Controls on Credit Unions: An Analysis of Regulatory Intervention in Australia," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 76(3), pages 437-460, September.
    2. Sharpe, Ian G. & Tuzun, Tayfun, 1997. "The underinvestment hypothesis and off-balance sheet direct credit substitutes," Pacific-Basin Finance Journal, Elsevier, vol. 5(3), pages 325-344, July.

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