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Introduction

Reasons for banks requiring liquidity

Capital Adequacy

Financial Institutions that Failed in RecentTimes

Conclusion

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The need to be able to cover withdrawal offunds by customers.

To meet interbank indebtedness! which

may arise on daytoday basis following thepayment clearing process"

To be able to meet unforeseen borrowingrequests from customers.

To be able to cope with interruptions to

their normal cash #ow.

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The capital of a commercial bank may be

de$ned as the value of its net assets.%That is total assets less total liabilities&.The capital base normally comprises thebank's share capital! various forms of

accumulated capital reserves and certaintypes of subordinated loan stock.

The capital base of a bank is vital for the

protection of its creditors %its depositors&and hence for the maintenance of generalcon$dence in its operations and theunderpinning of its longterm stability

and growth.

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Bank for Housing and Construction

Ghana Cooperative Bank

Lehman Brothers, a ()*year oldinvestment bank collapsed because it hadassumed risks several multiple times overits capital base! and had run out of liquidity.

+ehman was the biggest corporatebankruptcy in history in terms of assets %itheld ,-/ billion of assets&.

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+ehman's high degree of leverage madeit precariously vulnerable to marketconditions. For e0ample! in 1223 theratio of its total assets to shareholdersequity was (.

Another 45 investment bank MerrillLynch, had to be bailed out by 6ank ofAmerica in a ,)2 billion rescue bid.

American Insurance Group (AIG hadto be rescued with an ,*) billion loan

because it had destroyed its capital.

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The 6ank of 7hana measures thecapital adequacy of a bank! as apercentage of the ad8usted capitalbase to its ad8usted asset base! and

this should be (29 as alreadyindicated.

The importance of capital to a bank isagain given a global impetus by the6asel II Agreement on capitalstandards and relevant :4 ;irectives.

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For e0ample! in order to maintain authorisation

to operate in the 4

As already indicated! due to the highimportance that regulatory authorities attachto capital adequacy of a bank! control is morestringent and banks are statutorily required tosubmit prudential returns on a monthly basis!

and when they fall short of the required level!have /2 days to make up for the de$cit or facesanctions in the form of penalty payments.

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