An evaluation of capital adequacy within the Maltese banking sector

Abstract

Almost every aspect of banking is either directly or indirectly influenced by the availability of capital and/or the cost of capital. Capital is one of the key factors to be considered when the safety and soundness of a particular bank is assessed. Capital absorbs possible present and future Iosses and thus provides a basis for maintaining depositor confidence. Capital is also the ultimate determinant of a bank's lending capacity. The greater the capital base the larger its potential for a well-diversified Joan book. Finally the cost and amount of capital impacts on a hank's competitive position. Because shareholders expect a return on their equity, the obligation to earn it influences the pricing of bank products. There is also another market perspective. In order to grant loans and advances, a bank should normally be able to attract deposits from the public. Doing so requires public confidence in the bank, which in tum can be best established and maintained by a capital buffer. lf a bank faces shortages of capital, or if the cost of capital is too high, a bank stands to lose business to its competitors as a result of price differentials.