Question

Access to additional capital: since the bank was relatively small, it access to capital markets was limited. However, this limitation was not considered to be restrictive due to the fact that the other banking company could be relied upon to assist them with capital funds. The bank indicated that it was sensitive to current shareholders’ desire to avoid the diluting effect of new capital. Under Central bank rules a bank holding company is expected to be a source of strength to it subsidiary in terms of capital or liquidity

what assumptions and recommendation can be made given the above information

Answer 1

Capital Market is the part of financial system concerned with raising capital by dealing in shares, bonds and other long-term investments. Small banks face difficult to access capital markets and it was limited too. It helps the shareholders to avoid the diluting effect of new capital. So as per the rules of RBI, a bank holding company is expected to be a source of strength to its subsidiary which is in the terms of capital or liquidity. Small banks are often privately held or thinly traded and have limited access to capital markets. Treasury provided CPP (Capital Purchase Program) capital under only a single set of repayment terms.