When to bail out

level the proponents of free economy accept some form of regulatory hitch on organizations that become mighty powerful. The regulatory authorities fox a right to intervene, if the market forces are giving unfair advantages such as monopoly or pollution. Commercial cants can become mighty powerful and at the same be very fragile. Even flourishing capital markets have not undermined the importance of commercial blasphemeing.Commercial banks are a wide used tool to stimulate the economy through loans that stimulate spending and investment. Therefore, in essence the health of the banking sector is directly related to the health of an economy. Liquidity find is inherent to commercial banking because the depositors can come and assert their deposits at anytime. A mismatch of time to maturity of advances and deposits can realize severe problems. For instance, a wave of panic-stricken withdrawals can essentially give out a bank in no time.This can trigger organized risk and leave the entire economy shaken. The banks need to monitor their addition liability management statistics because any mismanagement can cut to bank runs or cash shortages. For these problems, central banks require of commercial banks to insure their deposits and supply them with liquidness support. By providing liquidity support central banks regulate the cash market and injecting cash in the economy when demanded. These solutions in effect lead to other problems.For example, in insured deposits, depositors stop monitoring a banks performance and the banks increase their risk appetite by increase lending. To address this issue the central bank requires banks to maintain a marginal capital adequacy ratio, and regulate insurance premiums to be proportional to the risk of a banks lending. However, recent stats suggest that capital adequacy is not a safe determinant to monitor banking sector. Commercial banks seize on to over rely on central banks liquidity support and tend to lend hi gh premium loans to institutions with lower conviction ratings.Even if such lending results in volatility in the notes market such variations are small compared to the banks capital. primeval bank needs to be proactive or else than be unstable because the public cost of economic instability and high interest grade is too high. Even the Basel II addresses risk capital framework only does not address provisioning for funding. The emphasis should be on liquidity rather than on solvency alone. Therefore, commercial banks need to be scrutinized through stricter prudential regulations.