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Capital Adequacy Standards: Are They Sufficient?

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  • Rahul Dhumale

Abstract

During the last two decades many countries have liberalised their financial markets. They have attempted to eliminate government intervention in setting interest rate ceilings, erecting entry barriers, interfering in credit allocation decisions, and have begun to privatise their financial institutions (FIs). However, recent banking crises have indicated a link between liberalisation and financial fragility and the subsequent trade-off between the benefits of liberalisation and the costs of increasing financial fragility in developing markets. Recent experiences in Asia have highlighted the importance of the soundness of domestic financial systems especially the need for a prudential regulatory, supervisory, and accounting framework before undertaking financial sector liberalisation. The object of the paper is to provide a link between the relative level of an individual bank's adequacy and its effects on the fragility of the banking system. Specifically, the probability of a banking crisis is modelled using the characteristics of individual banks - namely, their capital adequacy ratios. The paper concentrates on the importance of distinguishing between cosmetic and effective changes to capital adequacy ratios to avoid the systemic threats which can grow out of microeconomic weaknesses in domestic banking systems as witnessed in Asia.

Suggested Citation

  • Rahul Dhumale, 2000. "Capital Adequacy Standards: Are They Sufficient?," Working Papers wp165, Centre for Business Research, University of Cambridge.
  • Handle: RePEc:cbr:cbrwps:wp165
    Note: PRO-1
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    File URL: https://www.jbs.cam.ac.uk/cbrwp165/
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    References listed on IDEAS

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    Cited by:

    1. Rahul Dhumale, 2000. "An Incentive Based Regulatory System: A Bridge Too Far," Working Papers wp170, Centre for Business Research, University of Cambridge.
    2. Nupur Moni Das & Joyeeta Deb, 2018. "A Statistical Re-assessment of Capital Adequacy and Insolvency Risk in Commercial Banks of India," Springer Proceedings in Business and Economics, in: Aswini Kumar Mishra & Vairam Arunachalam & Debasis Patnaik (ed.), Current Issues in the Economy and Finance of India, chapter 0, pages 105-118, Springer.
    3. Mario Tonveronachi, 2007. "Implications of Basel II for financial stability. Clouds are darker for developing countries," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(241), pages 111-135.
    4. Mario Tonveronachi, 2009. "Implications of Basel II for financial stability. Clouds are darker for developing countries," PSL Quarterly Review, Economia civile, vol. 62(248-251), pages 117-142.
    5. Mario Tonveronachi, 2007. "Implications of Basel II for financial stability. Clouds are darker for developing countries," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 60(241), pages 111-135.

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    More about this item

    Keywords

    capital adequacy; banking standards; financial regulation;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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