Reasons for banks requiring liquidity
Capital Adequacy
Financial Institutions that Failed in Recent
The need to be able to cover withdrawal of funds
by customers.
To meet inter-bank indebtedness, which may
arise on day-to-day basis following the payment
clearing process;
To be able to meet unforeseen borrowing requests
from customers.
To be able to cope with interruptions to their
normal cash flow.
The capital of a commercial bank may be
defined as the value of its net assets. (That is
total assets less total liabilities). The capital
base normally comprises the bank’s share
capital, various forms of accumulated capital
reserves and certain types of sub-ordinated
loan stock.
The capital base of a bank is vital for the
protection of its creditors (its depositors) and
hence for the maintenance of general
confidence in its operations and the underpinning of its long-term stability and growth.
Bank for Housing and Construction
Ghana Cooperative Bank
Lehman Brothers, a 158-year old investment bank
collapsed because it had assumed risks several
multiple times over its capital base, and had
run out of liquidity.
Lehman was the biggest corporate bankruptcy in
history in terms of assets (it held $639 billion of
Lehman’s high degree of leverage made it
precariously vulnerable to market conditions.
For example, in 2007 the ratio of its total assets
to shareholders equity was 31.
Another US investment bank Merrill Lynch,
had to be bailed out by Bank of America in a
$50 billion rescue bid.
American Insurance Group (AIG) had to be
rescued with an $85 billion loan because it had
destroyed its capital.
The Bank of Ghana measures the capital
adequacy of a bank, as a percentage of
the adjusted capital base to its adjusted
asset base, and this should be 10% as
already indicated.
The importance of capital to a bank is
again given a global impetus by the Basel
II Agreement on capital standards and
relevant EU Directives.
For example, in order to maintain authorisation to
operate in the UK, and other EU countries, a bank
must hold capital equal in value to at least 8% of
its risk-weighted assets.
As already indicated, due to the high importance
that regulatory authorities attach to capital
adequacy of a bank, control is more stringent and
banks are statutorily required to submit prudential
returns on a monthly basis, and when they fall
short of the required level, have 90 days to make
up for the deficit or face sanctions in the form of
penalty payments.