Accounting assignment on: Australia’s capital

Overview

This essay would take into consideration the bank capital requirement, focusing majorly on the Australian Banks at the time of the financial crisis.This paper would also take into consideration the various sources of bank capital & the various risk patterns to risk-adjusted assets of the Australian Banks.

The superiority of the banking division specifically in regards to Australia’s capital has been increasing significantly for the past so many years. Since, there has been a global melt down; the banks have been incurring losses. The national & the international bodies have re thought of the number of changes to be made in the whole system.

A bank’s or financial institutions capital, in one of the easiest structure which symbolizes its capacity to overcome maximum amount of loss devoid of becoming bankrupt.During, the latest financial catastrophe in the various North Atlantic economies/ countries, there were many cases which showed suspicions regarding the failures of the financial institutions i.e. the banks which could be very devastating to the economy (Black, Kirkwood & Shah, 2009).

In order to avoid the above mentioned situation the nationwide regulators have promoted flexibility amongst the banking industry by detailing a least amount of the principal that is to be kept by the banks in order to secure their position in such circumstances (Black, Kirkwood & Shah, 2009).

The fiscal crisis has lead everybody to rethink & implement the same by changing the requirements, making stringent changes in the policies as well as the strategies which would help the banks as well as the other financial institutions to safeguard their position (Black, Kirkwood & Shah, 2009).

This essay would stress upon the fact that, as to how much least amount of capital is to be required to be kept by the banks or the financial institutions currently operating in Australia.  It also discusses about the various sources of capital, the pattern of risk adjusted assets in the Australian depository system’s assets position (Basel Committee on Banking Supervision, 2009).One of the major reasons as to why any bank, financial institution is required to keep a minimum amount of capital under its depository is that, according to Australian Prudential Regulation Authority (APRA), various rules & regulations have been enforced by this regulatory body regarding the capital adequacy in the banks (specifically in regards to Australia). According to the Basel Committee on Banking Supervision, certain conservative rules as well as capital values have been issued. This was termed as Basel II by APRA in the year 2008. These Basel II standards, rules laid down states that the financial institutions should keep a minimum amount fixed with them in order to safeguard themselves from the various kinds of losses which might take place during the financial crises. These principles laid down in the Basel Standards focuses upon the measurement of risk as well as definition of capital (Basel Committee on Banking Supervision, 2009).

According to the APRA’s chairman the supervisory role is to:Strengthen the various ways through which the Australian Banks would be able to identify as well as manage the different types of risks.

• Keep a track of all the capital requirements of the Australian Banks in order to be at par & take care of the risks which needs to be borne by the financial institutions.
• Proper utilisation of the funds available with the institute & a fair decision making process to be followed.

The APRA stated that all the banks should seize an overall capital of not less than 8 per cent of their weighted risk assets. Minimum 50 percent of the banks as well as the other financial institutions entire capital ought to be of an enhanced-quality Tier 1, implying a minimum Tier 1 ratio of 4 per cent. APRA can and does also increase these minima for individual banks where considered necessary on account of their risk profile (Basel Committee on Banking Supervision, 2009).

As on 2010, March the especially the Australian banking sector should have an average accumulative capital proportion of approximately 11.8 per cent & the average Tier 1 capital proportion of approximately 9.4 per cent, where both the ratios have been at an at a significantly rise over for the past many years (Basel Committee on Banking Supervision, 2009).

The various sources of funds available for the Australian Banks can be divided into the following two heads i.e. Tier I & Tier II & consisting of all the deductions too.The Tier 1 consists of the funds & sources which could be used by a bank in order to allocate the various types of losses without being hit by the bankruptcy. To quote, some of the for example would be, retained earnings, some ordinary shares which constitutes the majority of the Tier 1 capital in the various Australian financial institutions.

It also includes some specific convertible securities & preference shares. These securities do not cover much of the capital as it is difficult to allocate the loss on such type of securities. Therefore, according to APRA not more than one fourth of Tier 1 capital should be in this form.

The Tier 2 capitals majorly constitutes of the securities which generally be categorised under the senior creditors. The Tier 2 capital of the Australian financial system largely constitutes of the debt which could be in varied varieties such as the preference shares.

The total score of the Tier 2 capital of the Australian financial system as on 2010, March was amounted to be approximate to $33 billion. Both, the Tier 1 & Tier 2 capital are calculated after deductions (Australian Prudential Regulation Authority, 2009).

There are various patterns for risk adjusted assets in the Australian Banks. Some of the risk associated with the same are as Credit Risk, Liquidity Risk, Market Risk & Operating Risk.Firstly, the liquidity risk refers to a situation where in the authorised deposit taking institution i.e. ADI’s would not be able to pay off their debts & meet up with the requirements if they go into any kind of loss (Australian Prudential Regulation Authority, 2009).

Secondly, the credit risk refers to the main risk which is being faced by the Australian Banks since, its assets majorly comprises of advances, acceptances, loans & securities. But, it must be noticed that the risk faced by the Australian banks have been managed quite well.

Thirdly, operating risk refers to a type of loss/ risk which occurs due to fail in the internal processes systems, personnel as well as the various external events. This type of risk occurs due to some problem in the code of conduct rather than due to financial issues (Australian Prudential Regulation Authority, 2009).

Conclusion:The financial system of Australia has been significantly increasing its investment against the various probable losses in the years to come. Various national as well as the regulatory bodies from all over the globe have been formulated & main changes are being implemented in the capital regulations, which consists of the following i.e. upgrading the consistency, quality as well the transparency in the capital base, & fortifying the uncertainty coverage in the capital structure, putting into practice the leverage ratio & coming up with various counter capital needs. The particulars of the fresh international capital principles would be concluded with other reforms, in the years to come.

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