The ability of financial institutions to exploit opportunities within the C-A-P framework depicted in Figure 3.1 depends on a number of key firm-specific attributes. These include the adequacy of the institution's capital base and its institutional risk base, its access to human resources, its access to information and markets, its technology base and managerial culture, and the entrepreneurial qualities of its people.

Adequacy of the Capital Base

In recent years, financial institutions and their regulators have started to pay increasing attention to the issue of capital as a source of competitive power as well as prudential control (BIS 1986). This has always been true for activities appearing on the balance sheet. But with increasing concentration of domestic and international finance in the securities markets, the role of capital has become important as the principal determinant of risk-bearing ability in securities underwriting and dealing, as well as in off-balance sheet activities. One step removed, a large capital base that allows an institution to be a successful player in securities underwriting and dealing also may enable it to undertake mergers and acquisition activities, private placements and other value-added services for its clients.

Capital adequacy thus conveys a decided competitive advantage in bringing specific products to specific international markets, in maximizing firepower and reducing costs in funding operations, in being able to stick with particular clients in good times and bad—thus being considered a reliable financial partner—and in achieving compliance with capital requirements mandated by the regulators.

The Institutional Risk Base

Financial institutions fund themselves by creating financial assets held by others. In a deregulated environment where financial institutions are forced to bid for funds, the perceived quality of an institution is an important determinant of its ability to fund itself at the lowest possible cost. The level of embedded exposure to institutional risk has become particularly significant in the interbank market, and in the securities industry, leading to a substantial spread in funding costs between institutions and in erosions of funding availability from time to time, particularly in crisis situations.