END TERM PROJECT
COMMERCIAL BANK MANAGEMENT

TOPIC 5
BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK

Submitted to:

Submitted by: Group 5

Prof. D.N. Panigrahi

Abhishek Singh (2014013)
Anisha jain (2014042)
Bakul Malik (2014072)
Gurusha Godwani (2014100)
Ketki Chaturvedi (2014133)

CHAPTER 1
BANK CAPITAL MANAGEMENT- CAPITAL ADEQUACY FRAMEWORK

INTRODUCTION
Bank capital is often defined in tiers or categories that include shareholders' equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt. Capital ratios are commonly measured as a percent of bank assets or risk-weighted bank assets.
Bank capital serves as an important cushion against unexpected losses. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners’ equity is at risk in the event of a failure. Thus, bank capital plays a critical role in the safety and soundness of individual banks and the banking system.
Role of bank capital:
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Source of funds
– Start-up costs
– Growth or expansion (mergers and acquisitions)
– Modernization costs

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Cushion to absorb unexpected operating losses
– Insufficient capital to absorb losses will cause insolvency
– Long-term debt can only absorb losses in the event of institution failure

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Adequate capital
– Regulatory requirements to promote bank safety and soundness
– Mitigate moral hazard problems of deposit insurance by increasing shareholders’ exposure to bank operating losses
– Market confidence is important to depositors and other bank claimants

Capital Adequacy
Capital Adequacy is the minimum amount of capital that a bank must hold to function effectively. It is a measure of financial strength and stability. It is usually expressed as a ratio of its capital to its assets. A ratio that can indicate a bank’s ability to maintain equity