Capital adequacy management

Definition (1):

Capital adequacy management is a bank’s decision about the amount of capital it should maintain and then the acquisition of the needed capital.

Definition (2):

Capital adequacy management includes the decision regarding the amount of capital a bank ought to hold and how it ought to be accessed. From the perspective of a shareholder, using more capital increases asset earnings and leads to higher returns on equity. From the perspective of the regulator, banks ought to increase their buffer capital for ensuring the soundness and safety in a case where earnings can end up below a level that was expected.

Definition (3):

Bankers must handle their assets and liabilities properly for ensuring three conditions. Among them, one is that their banks have sufficient equity capital or net worth for maintaining a cushion against regulatory attention or bankruptcy but not so much that their banks become unprofitable. This tricky trade-off is known as capital adequacy management.

Use of the term in Sentence:

  • The professor was discussing capital adequacy management in the financial institution management and banking class and asking relevant questions to the students.
Share it:  Cite

More from this Section