A capital offence

In believing that healthy capital reserves would enable banks to weather the credit crisis, lawmakers and banking chiefs neglected one important fact, says Suresh Sankaran of Fiserv IPS-Sendero: that robust capital adequacy ratios do very little to keep a bank afloat when liquidity dries up. But liquidity management may offer a possible solution

Capital adequacy regulations are supposed to give the average investor and depositor the confidence that the financial institution is immune from risk, particularly systemic risk; but recent events have exposed the flaws in this notion. Eight days before it was nationalised, Northern Rock had a total capital adequacy ratio of 14.4%, nearly double the 8% required by the Financial Services Authority, in line with Basel II guidelines. HBOS as of December 31, 2007 had a total capital adequacy ratio