How Much Capital Does a Bank Need : A Few Points Regarding the Basel Accord

Basel framework for bank's capital adequacy has been criticized for its over reliance on external credit rating agencies. Moreover, implementation of Minimum Capital Requirement (MCR) under Basel-III is often linked to a decrease in economic growth as it requires banks to maintain a higher capital base which raises their cost of fund. In addition to these, here, we criticize the Basel accord for the capital requirement under this framework is not inspired by the essence of the basic accounting equation. Moreover, under Basel framework, capital requirement and liquidity parameters are discussed separately. Here, we argue that the capital requirement should arise as a by-product of the day to day liquidity management and hence both the requirements can be brought together under one umbrella which enables us to view the overall position of a bank from a more holistic point of view. Here, we attain all the above issues and provide a comprehensive framework regarding bank's capital adequacy and liquidity requirements which is claimed to settle all the aforementioned issues and reduces all the extensive paper works needed for the implementation of the Basel accord