BANK CAPITAL

Post-crisis, regulators worldwide are discussing a macro-prudential framework that would involve a regulatory policy focused on the system as a whole, rather than individual players.

Capital buffers are an extremely important component of the new macro-prudential regulatory framework.

The new framework aims at improving both quality and quantity of capital.

Let us understand that capital is a competitive charge on the resources available for lending with a bank and hence, stepping up counter-cyclical capital requirements and providing capital buffers comes with a cost for the banking system.

Capital enhancement, however, is a prudential requirement, as financial products and transactions are becoming increasingly complex and prudent risk management has assumed considerable importance.

With higher and modified nature of capital requirements proposed through the new Basel III accord in the aftermath of the financial turmoil, keeping banks well capitalised would be an added challenge.

Banks are already suffering from inadequacy of capital as the return on such capital does not encourage new investors.

Era of cheap capital is over and investors are also wary of the volatility of returns.

Newer instruments and techniques would be required to attract investors.

While creation of enabling conditions for capital flow to the sector would continue to remain on the top of the reform agenda, banks would need to grow their balance sheets by raising capital from the markets rather than count on government.

Considering the back-to-basics common equity focus of Basel II, growing bank balance sheets will increasingly pose the challenge of balancing interests of shareholder and depositors/ financial stability.