UNDERSTAND BANKS & FINANCIAL MARKETS: An Introduction to the International World of Money and Finance by Michiel van den Broek

Author:Michiel van den Broek [Broek, Michiel van den]
Language: eng
Format: epub
Published: 0101-01-01T00:00:00+00:00

(visit: Herstatt Risk; or copy in your browser: http://www.economist.com/node/574236)

The Basel Committee advises governments on international standards necessary to prevent defaults of banks and prevent major financial crises. The BCBS advice is published as the Basel Agreements and has been adopted by governments all over the world.

(Basel Committee website: http://www.bis.org/bcbs/).

Bank Capital

At the core of the Basel Agreements are minimum levels and quality of bank capital. Bank capital is a financial buffer for banks and financial institutions that can absorb unexpected losses. More capital increases the financial buffer between the bank’s borrowings and loan assets and thus lowers the probability of losses or loan write-downs leading to a bank default. However, the greater the equity ratio the more diluted are the profits of the Bank across shareholders. The minimum capital levels can be calculated by using the Capital Adequacy Ratio, or BIS ratio.

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