{'fraction_non_alphanumeric': 0.01997450063748406, 'fraction_numerical': 0.0, 'mean_word_length': 5.162303664921466, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
Risk and Capital Adequacy in Banks

Financial markets have become more volatile and more competitive. The scopes of banks and bank holding companies have expanded. Management decisions have become more vital and more complex. Modern theories of risk and capital can aid bank decision-making. With a better understanding of potential trade-offs, banks may choose a desired level of risks with a minimum waste of capital. Unnecessary risks can be avoided. Complaints are widespread that government regulations reduce productivity and raise costs of borrowing and lending. Bank regulations are specifically accused of reducing competition while giving birth to a plethora of wasteful nonprice competitive practices. Bankers’ decisions are said to be warped as they shape their operations and lending to circumvent regulatory constraints. Risk-taking is artificially reduced even as capital is wasted. Existing regulations and the bank examination system attempt to control capital, liquidity, diversification, and risks while promoting sound management. However, controls are based on tradition, industry norms, and subjective evaluations. How to measure risks and what is adequate capital have not been formulated in objective terms. The ratio of capital to assets has declined steadily. It is unclear whether this is due to market forces or to weaknesses in the regulatory system. In critical cases, problem banks have ignored regulatory constraints because suggestions for change could not be formulated in an enforceable manner. Yet the need for some regulation is widely recognized. Without regulations, an undue percent of financial institutions are likely to take excessive risks. Because of the large amount of leverage, the difficulty of depositors’ policing of risk levels, the high cost of information, and the number of small, uninformed depositors, an institution can profit by raising its risk ratio. Moral hazards are also high; it is hard to protect against conflicts of interest and self-dealing. The introduction of federal deposit insurance was a major reform. It reduced fear among depositors, ended bank runs, and strengthened the stability of the economy. It also potentially increased competition and choice among borrowers and lenders by making entry easier. Depositors do not have to seek size to insure the safety of their claims.