Bank Capital, Capital Requirements, Monetary Policy Tools, and the Likelihood of a Coming Crash
Journal Title: International Journal of Social Science And Human Research - Year 2024, Vol 7, Issue 01
Abstract
The purpose of this article is to discuss bank capital, the current capital requirements under the Basel Accords, Dodd-Frank, and various regulatory bodies. Tier 1, Tier 2, and the defunct Tier 3 capital requirements are explained. Other capital requirements categories are analyzed, along with the effects of capital requirements. The research then segues into the monetary policy of the Federal Reserve, examining the reserve requirements ratio, the rediscount rate, and open market operations. With open market operations, the four phases of quantitative easing are considered, followed by a review of the effects of quantitative easing. The article observed that the current reserve requirements ratio is 0.0 percent. The point of a financial institution possessing liquid or cash reserves is to act as a buffer in case of a bank run, where hordes of depositors demand their money. Given the trillions of dollars of potentially toxic securities held by the Federal Reserve, the apparent bubble in the stock market, and inflation, the threat of a financial crash is exacerbated, where banks may simply be unable to provide their depositors with the cash that they demand. The issue is that capital requirements are a relatively long-term measure of solvency, whereas when a bank run occurs, a financial institution’s solvency is dramatically stressed. With reserve requirements at 0.0 percent, if a market crash occurs, the value of an institution’s capital requirements may substantially decline, whereby a solvent entity is driven into insolvency by the fear and panic of its depositors without the ability to meet their immediate demands for cash.
Authors and Affiliations
Donald L. Buresh, Ph. D. , Esq.
Keywords
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- EP ID EP726200
- DOI 10.47191/ijsshr/v7-i01-07
- Views 91
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