Bank capital adequacy evaluation and measurement: problems and solutions

Abstract

The matter of bank capital adequacy evaluation is of great importance, and ensuring the relationship between risk and capital is one of the main conditions of financial stability of banks. Financial stability of the banking system is provided for at international level by means of Basel Committee rules. Due to introduction of new regulatory capital requirements banks are required to pay great attention to capital adequacy, analysis of its sources, structure and consider possibilities to ensure their compliance with the new Basel III rules until the set deadline.

The aim of the study is to evaluate capital adequacy in Latvian commercial banks, reveal existing problems, related with evaluating of bank capital adequacy and to develop suggestions on improving bank capital adequacy according to the effective and the planned Basel Committee requirements.

Methodological, analytical materials and publications of the Bank of Latvia, the Financial and Capital Market Commission and the European Parliament, and Basel Committee on Banking Supervision regulatory documents on commercial banks' capital adequacy evaluation were used in the research process. Publications in periodicals, statistical information of the Association of Commercial Banks of Latvia, the Republic of Latvia Credit Institutions Law and regulations of the Financial and Capital Market Commission were taken into consideration. The capital analysis of Latvian commercial banks was performed mainly based on financial information of banks: annual financial reports, balance sheet and notes to it, bank's capital flow and capital adequacy reports, capital adequacy and risk management methods, official audit reports on financial standing of commercial banks available with annual reports of banks. Analytical and business publications, opinions of specialised agencies (Moody’s Analytics, PricewaterhouseCoopers) and financial publications in mass media - were used as well.