A Note on Capital in a Functional Analysis of the Traditional Banking Industry

Abstract

ABSTRACT A functional analysis of the traditional banking industry is developed in this paper. Following a reflection on the possibility of conceiving a ‘banking production cycle’, its fundamental output is identified in credit and the input in deposit. The study then continues with an analysis of capital: the anticipated capital required for banking is solely equity capital and is mainly dependent on economic-institutional aspects. This paper then studies how regulation, rules and laws can define a ‘regulatory banking production technique’. Starting from the assumption of economies of scale in the banking sector, the scheme developed by the Basel Accords imposes a level of equity capital proportional to the level of risk-weighted banking assets. Therefore, a relationship between capital and output defined by these rules is conceivable, and the idea of ‘normal capacity utilisation’ in the banking sector becomes possible. Through the latter idea, the possible limitation of money supply by capital requirements can be overcome, thus validating the endogenous money approach.