LETTER OF TRANSMITTAL
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
Foner, Eric., Garraty, John A (eds) “Banking” The Reader’s Companion to American History, Houghton Mifflin: New York, 1991., pg. 191
Westpac Institutional Bank May 2010, ‘Westpac Market Insights Australia, New Zealand, G3 & China’. Retrieved June 6th, 2010 from - http://www.westpac.com.au/about-westpac/media/reports/australian-economic-reports/
Macquarie Bank (now Macquarie Group) has risen from a small, Australian subsidiary of a UK investment bank to become one of the world’s most prominent banks. It is particularly prominent in the field of infrastructure where an innovative, specialist approach to investing and structuring has given it a platform to grow assets and revenues and secure early market share in an infrastructure privatisation renaissance.
By the mid-1980s, US commercial banks were subject to primary capital requirements set by the SEC, OCC and FDIC while US securities firms were subject to the SEC's Uniform Net Capital Rule (UNCR).
Globally, banks have been facing big challenges in the last few years and continue to do so. As a result of the financial crisis, the regulators have tightened the minimum capital requirements with the aims to create a more solid and shock-resistant banking system especially for the so called Global Systemically Important Banks (G-SIBs). The Financial Stability Board is expecting to raise the total loss-absorbing capacity
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
It’s mandatory for all the banks to deposit a certain determined percentage of their assets with the central bank to make sure that the banks’ customer deposits are safe. These percentages are what the central bank adjusts to reduce or increase the banking lending ...
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Binhammer, H. H. & Peter S. Sephton. Money, Banking and the Financial System. Nelson, 2001.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
A variety of groups are concerned in bank profitability for various reasons. The bank shareholders would want to know if the value of their investments is high or low. The investors also use current and past performance to predict future price of the banks’ shares traded on the stock exchanged. The management of the bank as trustee of the shareholders is evaluated and compensated on the basis of how well their decisions and planning have contributed to growth in assets and profits of their banks. Employees of bank also are concerned with profits, since their salaries and promotions are frequently tied to the profitability performance of their banks. Depositors use bank performance and profitability as indicators of security for their deposits in the banks. Finally, business community and general public are concerned about their banks’ performance to the extent that their economic prosperity is linked to the success or failure of their banks.
This is followed in section 5 by an analysis of the recent changes in the banking industry. With the development of the financial system, declining entry barriers and the deregulation of the banking industry make banks no longer the monopoly suppliers of banking services and reduce their comparative advantages which they usually hold in the past. Whether the reasons give rise to the existence of banks are still powerful will be examined here, while section 6 offers a way of considering whether banks are declining by looking at the value added by the banks. When the value added by banks is examined, banks are not a financial intermediation, which not only conduct the traditional services but also provide more diversified