European Union Collaborates with Banks on Capital Adequacy

Some of the world’s largest banks will soon publish more details on how much capital will be required to be

Some of the world’s largest banks will soon publish more details on how much capital will be required to be held in a given corporate account to protect themselves against future losses. This has come about as a result of the European Union commencing an investigation in order to ascertain a structured scale for the ruling on minimum capital requirements for new and existing companies operating in the financial sector.

Designed to restore faith in the capital ratios that are the global benchmark for banks’ financial health, the parameters have not yet been finalized and government officials are waiting to see how banks publish these figures before any regulator steps in.

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In the wider international arena, many regulators have recently raised their minimum capital requirements, a recent example of this being Australia’s ASIC which despite having an existing structure in place, ruled that it was not sufficient to safeguard clients of financial institutions and forex brokerages against potential loss due to insufficient capitalization.

Other long-established regulators such as the FSA and NFA maintain a stringent ruling on capitalization, occasionally resulting in brokers experiencing difficulties in maintaining the required level of capital. By contrast however, the European Union as an entity has yet to define this on a federal basis across all of its member states.

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Essentially, matters relating to the raising of capital ratios have been handled by an international task force headed up by the bank of England. While it is quite possible that the rulings will increase the requirements for forex brokers and financial market participants (broker/dealers) across the region as a whole, in the UK it appears as if there may reduction of capital requirements for new banks in order to boost competition.

Essentially the British government are very worried about the level of lending by banks to small businesses among other risk exposure.

By deciding on and disclosing these ratios, there will be greater transparency relating to misleading information of banks’ capital adequacy that currently exists. Furthermore, this measure should restore investor confidence in banks that have experienced severe problems since the financial crisis of 2008.

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