There is a great deal of discussion within the banking industry today with respect to building shareholder value.

There is a great deal of discussion within the banking industry today with respect to building shareholder value. This is understandable in light of the importance placed upon a bank's capital position. Capital has been called, with good reason, the Mother's Milk of commercial banking. Because, when available in the proper amount, it perpetuates growth and strength; when absent, we risk stagnation and eventually, atrophy.

Having taken great liberty with the application of this analogy, let's examine, by way of review, whether there is evidence to support such a comparison.

What are some of the fundamental applications for an "Adequate Capital Position"?

• To satisfy regulatory requirements. This issue has two faces. One side represents, at times, an annoying mandate that must be met in order to be in compliance. The other, makes it very clear where the boundaries are and thus makes it easy to know the acceptable limits and the consequences for non-compliance.
• As an essential mechanism to respond to business cycles: Since business is never totally predicable, we need capital as insurance during down-cycles and as a tool to maximize opportunities during up-cycles.
• To support growth. A bank, no more than any other business, cannot expect to grow in a stable manner without a solid base.
• To maintain flexibility. Successful banks (businesses) need to maintain an adequate capital position in order to adjust and respond to the ever-changing competitive environment.
• To fulfil the Board's responsibilities. Any board would be hard pressed to meet the tenants of "Safety and Soundness" as defined by the regulators and increase shareholder value without a strong capital base in place at all times.

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