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Bank Capital Adequacy, Deposit Insurance and Security Values

Published online by Cambridge University Press:  06 April 2009

William F. Sharpe
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Extract

Since the first owner of a gold depository discovered that profits could be made by lending some of the gold deposited for safekeeping, there has been a concern for the “capital adequacy” of depository institutions. The idea is simple enough. If the value of an institution's assets may decline in the future, its deposits will generally be safer, the larger the current value of assets in relation to the value of deposits. Defining capital as the difference between assets and deposits, the larger the ratio of capital to assets (or the ratio of capital to deposits) the safer the deposits. At some level capital will be “adequate,” i. e., the deposits will be “safe enough.”

Type
IV. Result of a Study of Risk and Capital Adequacy in Banks
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 4 , November 1978 , pp. 701 - 718
Copyright
Copyright © School of Business Administration, University of Washington 1978

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References

REFERENCES

[1]Karaken, John H., and Wallace, Neil. “Deposit Insurance and Bank Regulation: A Partial Equilibrium Exposition.” The Journal of Business (07 1978)CrossRefGoogle Scholar
[2]Merton, R. C. “Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees: An Application of Modern Option Pricing Theory.” Journal of Banking and Finance (06 1977).Google Scholar
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[4]Ramaswamy, Krishna. “The Loan Operations of Financial Intermediaries and the Valuation of Secondary Financial Claims.” Ph. D. dissertation, Stanford University (04 1978).Google Scholar
[5]Rothschild, Michael, and Stiglitz, Joseph E.. “Increasing Risk: 1. A Definition.” Journal of Economic Theory (09 1970).Google Scholar
[6]Sharpe, William F. “Bank Capital Adequacy, Deposit Insurance and Security Values (Part I).” National Bureau of Economic Research Working Paper No. 209 (10 1977).Google Scholar