3 Answers | Add Yours
The aim of the standard capital requirement for depository institutions is "prudent" management of funds and "protection" of funds. When standards are violated, funds and depositors are not protected and imprudent management may lead, as clearly explained above, to collapses. In this extensively interconnected world economy, the consequence of such neglect and imprudence would be enormous, perhaps catastrophic (parts of the world are still scratching their way out of some of the consequences of the recent bank failures).
Not adhering to capital standard specifications can lead to irresponsible lending, and it is often a hallmark of a speculative bubble and collapse, as the previous response said. Complicating the problem in Spain and elsewhere is that many other countries in the EU have different capital requirements for their banks, despite agreements to the contrary. In the United States, the Dodd-Frank law, passed a little over a year ago, made certain capital requirements mandatory, particularly for large lenders.
The major consequence of this is that the individual banks (and indeed the entire banking system) could be vulnerable to collapse. If the banks do not keep enough capital, they are susceptible to failing in the event that loans go bad. We are seeing this right now in countries like Spain where the banking system is in need of recapitalization to prevent it from failing.
We’ve answered 319,633 questions. We can answer yours, too.Ask a question