Commercial Banks’ Capital Adequacy and Supervision Review of International Regulations and Practices

Abstract

The aim of this paper was to review the internatinal regulations and practices with respect to capital adequacy and supervision, with special focus on moral hazard hypothesis and commercial banks’ excessive risk teching behaviour. The result of the review highlights the evolvment of theoretical debates with respect to the adequacy of capital to be maintained by commercial banks operating in a given country. The debate is due to the fact that banks having high amount of capital may dare to take excessive risks, which leads to the concept of moral hazard hypothesis as a source of banking or financial crisis. On the other hand, banks having less amount of capital, below the minimum capital adequacy ratio set by either of the Basel accords of I, II and III, cannot sustain negative shocks of unforced financial crisis in an economy. as a result, the current banking literature suggests the revision of the Basel accords I & II towards the Basel accord III that incorporates a capital conservation buffer and a countercyclical buffer apart from the minimum capital requirements. Further, constraints towards this end has been raised in the literature as regulators capacity constraints related to lack of skills such as the ability to evaluate the quality of bank management and forensic accounting, are found sever in developing countries. Eventually, this paper suggests the remedial actions towards alleviating such constraints in the future.