The Impact Of Financial Crisis On The Uk Economy - 1240 Words

Executive summary The financial crisis 2007/08 led to the fact that some large financial institutions were under threat to collapse and had to be bailed out by the government to avoid a total meltdown of the financial system. The financial crisis was triggered by a combination of factors; some of them were the lack of regulations and supervision, excessive leverage practice, insufficient liquidity provision and a lack of adequate capital holdings by the banks. This report will focus on two different concepts bank’s capital and liquidity, explaining the importance of both for banks, how they link and interact with each other, and the risks banks could face in case of any potential shortfalls in these key areas. A shortfall in one of these†¦show more content†¦The Basel III proposals by Basel Committee on Banking Supervision (BCBS) specified minimum capital and liquidity requirements that should reduce chances of banking crises in the future. However, meeting these standard requirements can reduce banks’ profitability and entail additional costs. Capital and liquidity A bank s capital can be defined as shareholder equity, retained earnings and reserves, or bank s own funds, and together with bank s liabilities, or borrowed funds they provide funding for bank s assets. This includes financial, tangible and intangible assets. Due to the nature of business most of bank s assets are secured and unsecured loans to individuals and businesses and lending in the wholesale market. Whether it is a secured or unsecured loan, there is always a risk, known as the credit risk that the borrower will not be able to repay the amount borrowed, which can cause losses to the bank. The main characteristic of capital is the ability to