Requirements for Tier 1 capital and common equity will be 6% and 4.5% respectively. The liquidity coverage ratio will require banks to hold a buffer of high quality liquid assets enough to deal with the cash outflows faced in an intense short-term stress scenario. This is to prevent situations like a bank run. Leverage Ratio more than 3%: The leverage ratio is derived by Tier 1 capital divided by the bank 's average total combined
Since, these relationships involve money (and may also affect continuity of business), that’s why customers maybe conservative to switch to new banks due to high foreclosure / pay offs to close the existing liabilities with other banks. Chapter 9.4. Bargaining Power of Suppliers (Medium) Banks are dependent on capital and post the crisis, the regulators have made strict regulations for banks to ensure they maintain a decent Capital Adequacy Ratio. With these new criteria in place, banks must maintain some cash reserves for any contingency purpose. Banks depend on the capital that in turn depends on: 1.
Cash reserves are a key to fractional reserve banking system. It is clear that keeping fraction of deposits as cash and using own debt (deposits) for lending and spending calls for a need to commercial banks to keep adequate reserves in cash to facilitate for withdrawals
Because it is assumed that raising equity or other external capital is costly when banks are capital constraint, they cut lending and thereby amplify the economic downfall. A suggestion is that the capital charge for a credit-risk exposure is reduced when bank capital is scarce compared to lending opportunities (Kashyap and Stein, 2003). The Basel Committee (BCBS, 2009) was already aware of this issue and therefore implemented some safeguard in Basel II. This encompassed the use of long term data horizons in estimations of PD, introduction of loss-given-defaults (LGD) estimates and the appropriate calibration of the risk functions, which convert loss estimates into regulatory requirements. Additionally, stress test must be conducted by banks that consider downward migration of credit portfolios during economic downturns (BCBS,
EMERGING CHALLENGES: Technological changes in Indian banking system presents great opportunities and challenges for the banking industry. The primary challenge is to give consistent service to customers irrespective of the kind of customer. Different banks can differentiate their services by offering more technical facilities. Developing or acquiring the appropriate technology for the product, deploying it efficiently and then managing it to the extreme level is important to achieve and consistently providing high service and optimal standards while remaining economical and delivering sustainable return to shareholders. Leveraging technology is therefore, a key challenge that will be faced by the Indian banking sector.
Banks experienced difficulties during the financial crisis even though the prescribed level of capital was maintained as per the Basel II norms. Prior to the financial crisis, there was enormous liquidity in the market and funds were available at low cost. On the occurrence of the financial crisis which drew out liquidity from the market, there persisted severe stress in the banking system. Two objectives of maintaining liquidity ratios were: To ensure banks in maintaining adequate liquid resources in time of stress. Resources must last for a month.
The adoption of new technologies and trends is being facilitated in the industry for the competition and the customer’s overall experience. Many suppliers that are having similar strategies face a strong competition. The barriers for exiting the markets are high. Products and services of are undifferentiated leading the customer to focus on the prices offered. Low market growth, so it can be increased only by taking another firm’s market share.
Determinants of Capital Structure Collateral value of assets Collateral value of assets is one of the determinants of capital structure. There is a possibility that the stockholders transfer wealth from bondholders. Bondholders feel less vulnerable when an asset is collateralized against the funds (Titman and Wessels, 1988). Firms with a high collateral value of assets find it easy to issue debt. Collateral value of assets may have positive relationship with level of debt.
Financial market developments in the past decade have increased the complexity of liquidity risk and its management. The fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature and that which affects markets as a whole. Banks deal with public deposits and hence the confidence of the public is very important for them to continue their operations. Banks’ major profit comes from lending operation. In the changing scenario, when the entire deposit portfolio has become payable on demand, it is very important for the banks to maintain sufficient liquidity.
The significance of the role of the banks for the transmission of monetary policy prior to the financial crisis has been ignored. Central banks didn’t include the banking sector during the formation of macroeconomic models before the crisis of 2007-2010. Per different economic analysts, there were couple of reasons to not pay attention on the significance role of commercial banks for the transmission of monetary policy before the crisis. Firstly, it was technically difficult to model the role of financial intermediaries in macroeconomic model. Second, under most economic conditions, the role of financial intermediaries was not relevant.