Question

Commercial banks are faced with requirements to hold minimum levels of capital. Why?

	a.	To limit the exposure of the deposit insurance fund to losses from bank failures.
	b.	To absorb losses from operations and/or reductions in the values of assets in the banks' portfolios.
	c.	To alter the incentives on the part of managers and owners for risk-taking behaviors.
	d.	All of the above are reasons to require minimum capital levels for banks.

Answer 1

Option (d) : All of the above are reasons to require minimum capital levels for banks

Explanation:

Maintenance of a minimum capital adequacy ratio (minimum capital levels) places a restriction on the banks to maintain a particular percentage of capital with respect to its total risky assests This limits the deposits exposure to bank's losses as the bank can't lend money in risky assets nore than its minimum required capital.

The minimum capital maintained helps the banks to setoff any immediate fall in the value of its assets of any un-anticipated losses.