| Capital is at the top of any bank
supervisor's list. The most basic form of capital is equity capital, which is
the shareholder's financial interest or net worth. Equity capital serves several
purposes: it provides a permanent source of revenue for the shareholders and
funding for the bank; it is available to bear risk and absorb losses; it
provides a base for further growth; and it gives the shareholders reason to
ensure that the bank is managed in a safe and sound manner. Minimum capital
adequacy ratios are necessary to reduce the risk of loss to depositors,
creditors and other stakeholders of the bank and to help supervisors pursue the
overall stability of the banking industry. Basle Committee's "core principles for effective banking supervision" require that supervisions set prudent and appropriate minimum capital adequacy requirements and encourage banks to operate with capital in excess of the minimum. When it appears appropriate due to the particular risk profile, uncertainties regarding the asset quality, risk concentrations or other adverse characteristics of a bank's financial condition, considerations of requiring higher than minimum capital ratios are encouraged. If a bank's ratio falls below the minimum, banking supervisions will act to ensure that it has realistic plans to restore the minimum in a timely fashion, or may consider putting additional restrictions on the bank's operations. |