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Reasons for banks requiring liquidity

Capital Adequacy
Financial Institutions that Failed in Recent

The need to be able to cover withdrawal of

funds by customers.

To meet inter-bank indebtedness, which

may arise on day-to-day basis following the
payment clearing process;

To be able to meet unforeseen borrowing

requests from customers.

To be able to cope with interruptions to

their normal cash flow.

The capital of a commercial bank may be

defined as the value of its net assets.
(That is total assets less total liabilities).
The capital base normally comprises the
banks share capital, various forms of
accumulated capital reserves and certain
types of sub-ordinated loan stock.
The capital base of a bank is vital for the
protection of its creditors (its depositors)
and hence for the maintenance of general
confidence in its operations and the
under-pinning of its long-term stability
and growth.

Bank for Housing and Construction

Ghana Cooperative Bank

Lehman Brothers, a 158-year old
investment bank collapsed because it had
assumed risks several multiple times over
its capital base, and had run out of liquidity.
Lehman was the biggest corporate
bankruptcy in history in terms of assets (it
held $639 billion of assets).

Lehmans high degree of leverage made

it precariously vulnerable to market
conditions. For example, in 2007 the
ratio of its total assets to shareholders
equity was 31.

Another US investment bank Merrill

Lynch, had to be bailed out by Bank of
America in a $50 billion rescue bid.

American Insurance Group (AIG) had

to be rescued with an $85 billion loan
because it had destroyed its capital.

The Bank of Ghana measures the

capital adequacy of a bank, as a
percentage of the adjusted capital
base to its adjusted asset base, and
this should be 10% as already

The importance of capital to a bank is

again given a global impetus by the
Basel II Agreement on capital
standards and relevant EU Directives.

For example, in order to maintain authorisation

to operate in the UK, and other EU countries, a
bank must hold capital equal in value to at
least 8% of its risk-weighted assets.

As already indicated, due to the high

importance that regulatory authorities attach
to capital adequacy of a bank, control is more
stringent and banks are statutorily required to
submit prudential returns on a monthly basis,
and when they fall short of the required level,
have 90 days to make up for the deficit or face
sanctions in the form of penalty payments.