The analysis of bank capital adequacy: the case of Latvia

Abstract

The bank capital adequacy management problems have always been topical for each commercial bank and for banks supervisory institutions. After-effects of the financial crises have encouraged strengthening of capital adequacy requirements and therefore supporting the reasonable risk level. Basel Committee on Banking Supervision adopted a range of guidelines, which promote raising of bank stability and safety, stressing the importance of own capital as risk coverage.

The aim of the research is determination of factors influencing bank own capital adequacy and assessment of financial strength of capital of Latvian commercial banks. The subject of this research is Latvian commercial banks. Official statistical data of the supervisory institution of Latvian commercial banks - the Financial and Capital Market Commission - as well as financials statements of Latvian commercial banks have been used in this research. The authors have used such research methods as comparison, factors analysis, ratio analysis, charts showing statistic information and others.

As the result of investigation the authors have stated factors influencing bank own capital adequacy. The most important of these factors is credit risk, which is specially analysed in this research. The obtained results allowed the authors to make a range of conclusions, of which some are: in the period of financial crises Latvian commercial banks were operating on the verge of capital adequacy, banks did not have sufficient buffer capital, due to substantial losses during the period of crises capital adequacy was maintained only by the inflow of new share capital and subordinated capital. The authors have provided several suggestions concerning the management of bank capital adequacy to commercial banks.