Exam questions Essay Example | Topics and Well Written Essays - 2500 words

Exam questions - Essay Example Furthermore, the chapter reviews the success of fixed capital requirements in terms of maintaining the relations between desired capital and risk taking. It also analyzes ways through which banks reduce effectiveness by taking to riskier assets. Capital requirements are also referred to as capital adequacy or regulatory capital. This is the amount of capital that commercial banks hold due to the requirements of the financial regulator. These requirements are necessary for the financial industry; to ensure that commercial banks do not accumulate excess leverage which leads to insolvency. Commercial banks have some behavioral preference when allocating loans to individuals. However, the capital constraints can make the banks to review the behavioral preference. This means that the financial regulator could utilize the strong constraints in capital adequacy to; review the fluctuations of the Micro economy and direct the economy to the required direction through the financial intermediaries like banks (Altunbas)1. Based on the approval of the Basel II model, this discourse defines the research question in the following way: Are rigid pressures exerted by minimum capital requirements efficient in minimizing the risk-taking behavior of banks? The framework of the Basel II structure in the subprime crisis forms the basis within which professionals question the proposals. This area covers the inadequacy of the level of capital requirements. The focus on examining the efficiency of regulatory capital requirements during the implementation of the proposals in Basel I model report executed from 2002 is part of the entire discourse. However, the discourse does not aim at testing the Basel I framework. Instead, it assess the efficiency of the regulatory pressure in relation to the degree of capital cushion in cutting down on the risk-taking behavior of financial institutions in the