An important aspect of banking regulation is capital adequacy regulation. Capital adequacy regulation is particularly important because deposit insurance and other elements of the federal safety net provide banks with an incentive to increase their leverage beyond what the market - in the absence of depositor protection - would permit.

a) What is the relationship between capital adequacy and the stability of the financial system?

b) Why are regulators concerned with the levels of capital held by a financial institution compared to a non-financial institution?

c) What is the disadvantage of a required capital ratio that is too high?

Answer rating: 100% (QA)

a The relationship between capital adequacy and the stability of the financial system is crucial Capital adequacy refers to the amount of capital a fi... View the full answer