ICB report recommended that an increase in bank equity would influence the ability of the banks to absorb losses (Great Britain: H. M. Treasury. 2011:25). This recommendation is a strength because the capacity of the banks to be resilient to shocks depends on equity commanded by the bank. Equity has the capacity to absorb losses that emanate from and post the resolution. Capital requirement refers to the value needed by law for a bank to operate. The crisis proved that the bank’ s ability to absorb losses depended on the equity, which is subject to the capital requirement.
Adopting this recommendation has the following influences on the financial market. First, increasing the capital requirement would discourage lending because many banks will increase the rates of borrowing. This would influence the money supply in the financial market. Second, the bank’ s leverage would influence the stability of the banks during the financial spill off (Chancellor of the Exchequer. 2011:23). The sensitivity of the equity fluctuates with the bank’ s leverage. Banks would demonstrate the ability to compromise on their equity. Disruption of payment would occur in an event when the banks cease the power to absorb losses.
Financial meltdown would occur when debts influence important banks into insolvency (Hoose, 2010:123). Concomitantly, firms holding debts lack the ability to discipline the bank. The situation would trigger loses which moral will dictate that should not influence any side of the divide. Recovery plans in events of financial spill off are crucial because it would revitalize the financial market. The strength of the plan is to cushion the financial market from spilling. Loss-absorbency policy creates an opportunity for the banks to make a resolution, which would alter situations, which drag banks into insolvency (Hardy, 2006:16).
). For instance, the struggling bank has a recovery plan, it can avert the situation through the sale of assets, issue new equity, and restrict bonuses and dividends.
Please type your essay title, choose your document type, enter your email and we send you essay samples