Capital Adequacy Standards Capital Adequacy: Thesis

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EU nations have blamed deregulation in the U.S. sector for the credit crisis and subsequent recession, specifically the complex risk exposures not fully understood and assessed by banks and investors; poor and fraudulent underwriting standards; lack of investor and agency due diligence; a failure of transparency; and the structure of compensation schemes and incentives in the U.S. banking industry (Griffin 2008). The failure of the U.S. capital adequacy standards was apparent when even U.S. banks that possessed what would, under normal circumstances be adequate capital reserves were taxed in the subsequent panic, after Lehman Brothers was not 'bailed out' by the U.S. government and many lenders demanded a return on their investments.

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The EU has always had more stringent liquidity risk management system. The current system requires all banks to have liquid assets that cover 100% of potential outflows over am eight-day period and 90% of potential outflows over a nine to thirty day period (Griffin 2008). But even with such requirements, EU banks were not buffered against the U.S. credit meltdown. Greater international cooperation is clearly demanded between nations, as well as greater capital adequacy requirements, stress-testing and due diligence on the part of outside agencies......

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