What is a moral hazard? How did the example of Long Term Capital create a moral hazard in the US ...

Capital management is defined as making a strategy to possess sufficient and equivalent level of capital which includes working capital current assets current liabilities and long-term capital.

This helps the company to maintain the sufficient cash flues and comply with its obligations what represent the significant decision is taken regarding the capital structure decision where they have to decide what will be the equity owners capital and what will represent the debt.

The Financial Institute broadly have to discover the optimal capital structure which provides the higher profitability levels to the financial institute without wearing losses or becoming insolvent. Management has to choose the financial right financial capital structure which Will cause the lower rate of risk to financial institute as well as all stakeholders Some of the regulations become important to the Financial institute capital structures as the Financial institute faces many risk and these decisions helps in determining the appropriate allocation of capital by setting minimum standards.

Management has to recognize the appropriate allocation of capital in the financial institutes.

These regulations made out from this can be determined by various finance theories. These theories provide two key decisions regarding capital decisions. The first decision is taking on the basis of capital adequacy requirement and.

Another key decision is considered on the basis of risk return trade-off. Regulations of capital introduced as moral hazard in the management of the financial institute for the decision of Capital Management. Without regulation based decisions management has to discover the capital structure which provides high profitability without losses for causing insolvent situations. Under the regulation based decisions regulator sets the minimum standards which the management has to fulfil according to theories they don't consider whether it is profitable or risks as per the companies requirement. For example during the GFC, the Royal Bank of Scotland examined crisis because of complying with the capital regulations and failed to bear the risk and also lead to the losses which exceed its capital.