A Normative Approach to Bank Capital Adequacy

Eli Talmor

Journal of Financial and Quantitative Analysis, 1980, vol. 15, issue 4, 785-811

Abstract: Virtually all commercial banks in the United States are supervised by one of the three Federal bank regulatory agencies. Although these agencies share the objective of identifying banks with financial difficulties that may lead to their failure under adverse conditions, they have never reached an agreement as to a uniform approach to capital adequacy. Under these circumstances and because of its critical value to bank regulation, the issue of capital adequacy has been extensively investigated by both practitioners and academicians. Those efforts have tended in recent years to concentrate on characterizing problem banks by using multivariate discriminant analysis. Typical examples are studies by Dince and Fortson [10], Sinkey [25, 26], and Sinkey and Walker [27], which use this method to identify the most indicative financial ratios for bank soundness and compare the ability of different formulas to predict bank failure.

Date: 1980
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