Abstract
This paper examines the effect of the Bank for International Settlements solvency ratios on bank financing, with particular reference to Irish and UK major clearing banks. The paper discusses the rationale behind bank regulation and in particular capital adequacy ratios. These ratios are a measure of own capital to total assets employed, weighted by risk. Because these ratios are based on accounting numbers, accounting rules will affect the size of both capital and total assets. The paper shows how different accounting rules in the US and UK can result in quite different measures of capital. The paper also examines financial innovation and portfolio adjustments by banks in response to these ratios, and considers some evidence for changes in asset composition in response to risk weightings.
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