For example, a bank’s capital ratios can be rendered meaningless or highly misleading if they are based on inaccurate assessment of asset quality, off-balance sheet exposures and contingent liabilities. A bank may be reporting high capital ratios when in fact it may be insolvent due to poor asset quality and inadequate provision for losses.
Furthermore, stringent capital requirements may be of little use if the corporate governance system of banks are deficient. Capital merely acts as a cushion against losses and can never be a substitute for poorly managed organisations. On-going vigilance in respect of corporate governance of banks as another over-arching priority in the supervision of banks is critically important.