Miles et al(2012) in their study of optimal bank capital conclude ‘thatthe amount of equity capital that is likely to be desirable for banks to
use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.’
Within the context of a discussion of how international capital adequacy rules have developed and in light of the banking crisis of 2008, critically assess this claim.
Student Assignment Guidelines
Unit 8 of the module notes and Chapter 12 of Koch and MacDonald (2010) should be carefully studied in preparation for the assignment.
As there is no one correct way to tackle the question, the following are only suggestions as to how the assignment might be tackled. To set the assignment in context will probably require discussion of how banks make decisions about their capital structure. The relationship between leverage, profitability and the risk of insolvency might be discussed. What constitutes capital and why regulators have come to emphasise its importance in underpinning the stability of banks and the banking system might also be examined. Th e strengths and weaknesses of the risk-weighted assets approach to capital adequacy contained in the Basel I accord will probably be discussed. What constitutes capital and why it is important to bank safety should be analysed in detail. Why Basel II was regarded as an improvement on its predecessor should also be discussed. A balanced assessment of the merits of Basel I and II given the collapse of many large banks around the globe should be provided.
How Basel III attempts to deal with the weaknesses in earlier accords revealed by the financial crisis will also be considered towards the conclusion.
Note that the assignment askes for a ‘critical’ assessment of the claim by Miles et al (2012). Irrespective of the position that is taken on the statement, it is important to justify your position. Credit will be given for assignments that can demonstrate their knowledge of the relevant material by offering insights into its limitations and weaknesses. Relevant examples will be used to support the argument and credit will also be given for evidence of wider relevant reading and research.
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