Risk-based equity requirements: how equity rules for the financial sector can be applied to the real economy
Date Issued
2012-01-01
Author(s)
DOI
10.5235/jcls.12.2.255
Abstract
It is undisputed that rules are necessary to cope with the risks of failing financial institutions in the financial sector. These rules link the risk profile of a financial institution to the quanti-tative and qualitative properties of its capital. In the real economy the discussion proceeds from the opposite direction, putting the necessity of a minimal capital and its regulation into question. This essay shows however, that even for the real economy, rules are in place which require the board of a company to adjust the risk profile to the level and structure of the com-pany's equity and vice versa. The relationship between risk-bearing ability and equity leads to a set of principles and rules on how to determine the correct amount of equity. The essay de-scribes these rules and their procedural enforcement based on company and accounting law rules.
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