Challenges in maintaining the regulatory capital requirements

Satish Sharma, John Lavery and Konstantin Polyanskiy

International Journal of Financial Services Management, 2010, vol. 4, issue 4, 243-259

Abstract: Within the current theoretical literature it has been established that banks tend to maintain the regulatory capital requirements either by raising additional capital through equity issues or by selling/substituting risky assets. This paper bridges the gap for a comparative explanation in relation to Basel II system requirements by addressing three specific questions relating to capital adequacy, risk exposure and equity issues which have arisen as a result of two external factor changes: firstly, the adoption of the Basel II standards, and secondly, improvements to UK Financial Services Authority (FSA) regulations. Prior studies on UK banks have revealed that capital has been maintained by issuing equity rather than through the substitution of risky assets. In the light of the recent changes brought by the Basel II system of risk-based capital requirements, the approach adopted by UK banks might have changed. Thus, this paper presents an empirical research on how UK banks maintain the regulatory capital requirements when Basel II regulations are imposed. The findings suggest that there is no common mechanism adopted by UK banks for compliance with the regulatory standards.

Keywords: Basel II; regulatory capital requirements; capital adequacy; risk exposure; equity issues; UK Financial Services Authority; FSA regulations; UK banks; United Kingdom; banking; bank capital. (search for similar items in EconPapers)
Date: 2010
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