hi,

I have some accounting type questions about the need for banks who have suffered credit market write downs to raise capital:

- (under Basle II and FSA requirements etc) do bank's have to raise capital to keep up their level of "Shareholder Equity" or their cash balances ?

- similar question stated a different way, does capital adequacy refer to the ratio of shareholder equity to risk assets or the amount of cash to risk assets ?

- if a bank has a "leverage ratio" of 25:1 does this refer to
debt:shareholder equity
debt:cash at hand
risky assets:shareholder equity
?

Any help on any of the above would be much appreciated

So far as I understand it, it's cash balances - I don't believe shareholder equity has anything to do with it as this changes constantly. Leverage also relates to the amount to debt to deposits, so far as I understand it. Hope that helps.

Raising capital means 1. an infusion of cash into the company, and 2. a recording of a new claim against those assets - shareholder equity.

Remember, shareholder equity is a record of claims against the banks assets - it is not a 'thing of value' from the viewpoint of the bank entity.

capital (equity) = assets - liabilities.

I work as an auditor, with a portfolio including a major bank, and the headaches capital adequacy cause are not worth thinking about.


Stephen