Outline the key elements of the latest risk-weighted capital adequacy requirements for Australian banks and briefly explain their purpose
The 1980s and early 1990s saw barriers to entry to the financial system removed, foreign exchange controls removed and the foreign exchange market deregulated, and direct controls removed on participants' lending activities and lending rates as well as on their asset portfolios. Foreign banks have established in Australia, Australian banks have increased their overseas activities, and foreign exchange market turnover in Australia now exceeds $50 billion a day.
Prior to the adoption of the capital adequacy requirements, the Reserve Bank (ARB) recognized the need for a prudently managed bank to maintain, at least, a certain minimum capital to asset ratio. LIBRO
The Reserve Bank had set a requirement that a bank's capital should be at least 6 per cent of total balance sheet for those banks established before 1981 and 6.5 percent for those banks established after 1981. By the mid-1980s it was recognized that a simple capital ratio was inadequate because it did not distinguished between the different risks of various assets on the balance sheet and second it did not take account of the rapidly expanding volumes of off-balance-sheet business and the accompanying risk exposures.
In August 1988 the RBA introduced consolidated, risk weighted capital requirements for banks; the Banking Act 1945 was amended and the original 1988 Basel Capital Accord, developed by the Basel Committee on Banking Supervision (Basel Committee) was born to allow introduction of prudential requirements by regulation
Definition of Capital
1. Capital is the cornerstone of a bank's strength. The presence of su ...