A NOMINATIVE APPROACH TO BANK CAPITAL ADEQUACY.

The article focuses on a normative approach to bank capital adequacy. This article provides a model that avoids the reliance on arbitrary cut-off ratios. Instead, the model utilizes finance theory and formal probabilistic considerations in order to provide a testable theory of bank risk and to derive a comprehensive expression for bank capital adequacy. The article focuses on the sensitivity of the bank's sources and uses of funds to several different factors as the major determinant of capital adequacy.