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Financial Markets and Risk
Pages 10 (2510 words)
Report on Financial and Market Risks in Banking sector and the ways to minimize the systematic risks. Dated 01 June 2011 Understanding capital adequacy and capital liquidity: Financial risks are inevitable while performing banking activities. Hence, liquidity and capital needed to be well maintained by the banks and the other financial institutions.
It hinders the daily operations and outflows for settlement of balance account. Due to severe cash crunch withdrawals also get affected. Owing to non-liquidity and non-adequacy of reserves the bank turns to be insolvent. They are the measures of financial and market strength of a bank or a financial institution. Capital adequacy is the ratio between the capital and risk weighted assets. So, strength in capital base instills confidence within the depositors. This shows that there is a minimum possibility of insolvency due to systematic risks. It helps to attain stability during economic stress. It also helps to reduce the knock on effect of the stress that comes from the financial environment to the real economy. It helps to measure the financial stability and strength. Bank of International Settlement (BIS) provided a standard for capital adequacy i.e. primary capital base of a bank should be at least 8% of their assets. The regulators generally try to ensure that the banks and the other financial institutions have enough reserve to sustain themselves in an event of crisis. It helps to protect depositors as well as protects the wider economy from collapsing. It has been historically true that failure of big banks affect the wider economy. Financial risk from such economic downturn is termed as systematic risk. ...
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