Banking Insights: Trends in Capital at District Banks: 1965–76
Capital-to-asset ratios and growth rates of
capital are often used as quantifiable
measures of the health of the banking industry
and of individual bank soundness. The
question of what constitutes adequate levels
of these measures has been of concern to
bank regulators for some time. The problem
of bank capital assumes greater importance
during periods when bank profits are depressed,
both because capital is more likely to
be called upon to cushion losses on assets
during such periods and because additions to
capital in the form of retained earnings do not
keep pace with asset growth. The result is an
erosion of capital-to-asset ratios, which can
be exacerbated if bank assets continue to
grow rapidly.