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Trends In Australian Bank Capital Essay

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This report's topic is Trends in Australian Bank Capital. The content is as following:
1. The explanation of why "Regulators usually want more equity capital whereas shareholders usually favour less equity capital"
2. The differences between bank equity capital and bank regulatory capital
3. A discussion of the functions of bank capital and the role of the risk-return trade-off
4. The differences between tier 1 and tier 2 capital
5. The components of tier 1 and tier 2 capital and the cost and risk implications of them
6. Details of the trends in the four major Australian banks for the last five years.

1.
In Hogan et al (2004) Page 249 states that ¡§from the shareholders¡¦ point of view, the appropriate amount of capital is an amount that is small enough to produce at least an adequate return on capital and yet is large enough to absorb risk.¡¨ However, bank regulators have the responsibility of protecting depositors¡¦ funds and the safety of the financial system, which requires ¡§banks with higher credit risk to hold higher minimum capital.¡¨
The following table shows the capital ratios for the four major Australian banks over the last five years:
2004 2003 2002 2001 2000
Westpac Banking Corporation Tier 1 6.9 7.2 6.5 6.3 6.6
Tier 2
Total 9.7 10.5 9.6 9.9 9.6
Commonwealth Bank of Australia Tier 1 7.43 6.96 6.78 6.51 7.49
Tier 2 3.93 4.21 4.28 4.18 4.75
Total 10.25 9.73 9.8 9.16 9.75
ANZ Banking Group Limited Tier 1 6.9 7.7 7.9 7.5 7.4
Tier 2 4.0 4.0 2.8 3.2 3.4
Total 10.4 11.1 9.5 10.3 10.2
National Australia Bank Limited Tier 1 7.3 7.7 7.6 7.5 6.6
Tier 2
Total 10.6 9.6 10.0 10.2 9.3

Sources: http://www.anz.com; http://www.commbank.com.au; http://www.westpa...


... middle of paper ...


...h developing appropriate risk management techniques and problems with defining operational risk caused the initial plan to be postponed and it will now not be implemented internationally until 2007. APRA, however, would like the Australian banks to run under this system in 2005.

Reference:
¡P Hogan et al (2004), Management of Financial Institutions 2ed, John Wiley & Sons Australia, Ltd
¡P Orgler/ Wolkowitz (1976), Bank Capital, Van Nostrand Reinhold Company
¡P Brenton Goldsworthy, Carlos Schulz, Geoffrey Shuetrim (2000), Capital Management of Deposit Takers: The Impact of Prudential Requirements, Australian Prudential Regulation Authority
¡P Monash University, AFF 2401 Commercial Banking and Finance Lecture notes
¡P Herbert V. Prochnow and Herbert V. Prochnow, Jr. Prochnow, Herbert Victor (1897), Changing world of banking
¡P J. K. Gifford, Australian banking


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