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Fundamental principles of a sound banking system
1. Sachin Karpe Explains the Fundamental
Principles of a Sound Banking System?
Sachin Karpe talks about the fundamental principles of
a sound banking system. A sound banking system
must have a heavy handed regulator that enforces a
number of best
practices upon the
supervised banks.
This regulator is
usually a Central
Bank, such as the
FED. These best practices are, in sum:
1. Asset/Liability pricing at market levels ensures
banks' numbers reflect the current reality/ health of
their finances.
2. 2. Controls:Controls:Controls:Controls: banks must monitor their activities, liquidity
and solvency daily. They must have sound systems
and controls in place.
3. Capitalization:Capitalization:Capitalization:Capitalization: Regulators must ensure banks hold
enough capital to absorb potential losses. The
capitalization handbook is the Basel regulation, that
establishes leverage levels for all banks worldwide.
4. Risk CRisk CRisk CRisk Controls:ontrols:ontrols:ontrols: Banks must manage risk exposures
pro-actively. Mr. Karpe also adds on the market side,
this means measuring value-at-risk, stress testing
portfolios, etc. On the credit side, it must analyse and
monitor clients constantly, and provision losses based
on credit ratings and probabilities of default says
Sachin Karpe.
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