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Capitalization and Profitability in Canadian Banking
Published online by Cambridge University Press: 07 November 2014
Extract
In view of the approaching revision of the Bank Act in 1964, it may now be appropriate to re-examine contemporary opinion and practice concerning commercial bank capital. It is tempting to inquire whether there is an optimum ratio of capital to assets towards which commercial banks should aim. The traditional economic function of capital accounts has been to protect bank depositors against loss caused by depreciation of bank assets. “Bank capital is in effect a first line of deposit guarantee. Any supervisory standard for measuring capital adequacy should be expressed in terms of the function of bank capital. The function of bank capital is to protect the bank creditors, mostly depositors, against ultimate loss.”
Taking a literal view of this function, supervisory authorities in the United States came to apply a standard ratio of capital to deposits of 10 per cent; “there appears to be no scientific basis for this particular ratio. It is simply a good round decimal, easy to calculate at a glance.” Then, as the capital: asset ratio fell substantially with the increase of bank holdings of government securities, a capital: asset standard was suggested. Since losses result from asset depreciation, and bank assets do not all involve the same degree of risk, assets seemed a more relevant guide to capital requirements than deposits. Such an assets standard would not indicate a need for more capital until earning assets of some inherent risk were being acquired. Incidentally, if protection of assets were the accepted function of bank equity, it would only be that portion of capital funds in excess of fixed assets which would be relevant for the numerator.
- Type
- Articles
- Information
- Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 27 , Issue 2 , May 1961 , pp. 192 - 204
- Copyright
- Copyright © Canadian Political Science Association 1961
References
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