Bank Responses to COVID-19: Systematic Risk and Capital Adequacy

Abstract

Capital adequacy ratio could be regarded as a resiliency buffer added to the bank’s balance sheet. It helps to absorb risks and prevent potential losses for banks. This paper briefly introduces the development history of the capital requirement in the Basel accords. And highlights the importance and effectiveness of the capital adequacy ratio by comparing its role against systematic risk in the example of the 2008 Global Financial Crisis and the 2020 COVID-19 pandemic crisis. Moreover, this paper builds up a comparative analysis of the financial system and finds that banking is more able to fit in the revised capital regulation that matches the increasing risk level than non-bank institutions. The study also dissects the applicable conditions of capital adequacy ratio, which could possibly expose to greater shock coming from the crisis in the emerging country than the developed country, and that would lead it out of compliance with the minimum requirement of Basel regulation. Furthermore, the study is supported by the point that, shadow banking sector would undermine the intention of Basel regulations to withstand the systematic risk. Besides, the methods taken in respect to the COVID-19 pandemic are also discussed in this paper.