Imagine you are shopping for a new car—and not just based on the colour. You might consider the number of people it fits (especially if you have kids, despite initially warming to the idea of a convertible coupé), the mileage, the CO2 emissions (if you still want to be admitted to within Paris city limits in a couple of years), how fast it can go, the crash test results, and many other metrics.
Turns out there is something similar for banks.
When we invited some experts from the European Investment Bank to appear on ‘A Dictionary of Finance’ podcast to talk about best banking practice and banking regulation, we found out banks have to publish their:
· capital adequacy ratio
· leverage ratio
· liquidity ratio
· large exposures to single counterparties
· and various other metrics.
These ratios have threshold levels that the bank has to meet so that it’s allowed to operate.
But these ratios can also be used by consumers and investors when deciding whether they want to engage with a certain bank.
The ratios are prudential requirements for banks. Additionally, there are also non-prudential requirements, which deal with issues such as how the bank is governed, how transparent it is, how compliant it is with other regulation, etc.
As Luis Garrido, EIB managerial advisor, elegantly states, the fact that these are called non-prudential requirements, does not mean that these are imprudent. It just helps differentiate from the prudential requirements, which mostly deal with the financial health of the bank and help ensure it doesn’t go bust.
Joining Luis on the podcast, we had Marine Viegas, credit risk management officer of the EIB’s regulation and best banking practice division, and Tero Pietila, head of the EIB’s regulatory matters division for this very informative episode.
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