EECS 1541 Lecture Notes - Lecture 12: Retained Earnings
22 Jun 2018
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EECS 1541 Lecture 12 Notes
Introduction
EU countries
A bank established in any one of the EU countries has the right to expand into any or all
of the other EU countries.
As a result of this act, banks have expanded across European countries.
Efficiency in the European banking markets has increased because banks can more
easily cross countries without concern for the country-specific regulations that prevailed
in the past.
Another key provision of the act is that banks entering Europe receive the same banking
powers as other banks there.
Similar provisions apply to non-U.S. banks that enter the United States.
Basel Accord Before 1988, capital standards imposed on banks varied across countries
This variance gave some banks a comparative global advantage over others when
extending their loans to MNCs.
Banks in countries that were subject to lower capital requirements had a competitive
advantage over other banks because (1) they could grow more easily and (2) a given
level of profits represented a higher return on their capital.
Furthermore, a bank so advantaged was not perceived by investors to have excessive
risk, despite its limited capital, because they presumed that its government would
protect it from failure.
In 1988, the central banks of 12 developed countries established the Basel Accord,
according to which their respective commercial banks were required to maintain capital
(common stock and retained earnings) equal to at least 4 percent of their assets.
For this purpose, banks’ assets are weighted by risk, which means that a higher capital
ratio is required for riskier assets.
Document Summary
A bank established in any one of the eu countries has the right to expand into any or all of the other eu countries. As a result of this act, banks have expanded across european countries. In 1988, the central banks of 12 developed countries established the basel accord, according to which their respective commercial banks were required to maintain capital (common stock and retained earnings) equal to at least 4 percent of their assets. For this purpose, banks" assets are weighted by risk, which means that a higher capital ratio is required for riskier assets. Off balance sheet items are also accounted for, so banks cannot circumvent capital requirements by focusing on services that are not explicitly shown as assets on a balance sheet. Efficiency in the european banking markets has increased because banks can more easily cross countries without concern for the country-specific regulations that prevailed in the past.
