Abstract
IN THE annual reports of the supervisory authorities are frequent references to the depleted condition of the, capital ratios of the commercial banks and recommendations to the effect that an increase in capital ratios is highly desirable.' Moreover, is a growing volume of literature in the professional journals, but, apart from general discussions of the merits of particular ratios,2 little of a constructive nature has been accomplished.3 It is the object of this paper to emphasize the need for study of the capital ratio problem on a more restricted basis than has hitherto been employed, to expose some fallacious views, and to make some suggestions which might have value in the field of bank supervision. It is no part of our intention to discuss the merits and demerits of any particular ratio. It is sufficient for this study to say that we are in complete agreement with the great majority of bankers and economists who are convinced that there is no acceptable substitute for the protection afforded both depositors and shareholders by an adequate capital structure4 and that further substantial increases in capital accounts will require the sale of common stock to private investors, with the result that the commercial banks must be permitted sufficiently large earnings to be able to continue to add to their capital accounts through retained earnings and to sell their stock to the public.5
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