Question 1:
a. Distinguish between regulatory capital and balance sheet capital and illustrate how each of them is measured. (4 marks)
define regulatory capital – use academic source
brefly talk about basel accord tier 1 and tier 2
define balance sheet capital – use academic source
the difference between the two
b. Identify whether the Basel Accord is based on regulatory capital or balance sheet capital and illustrate how this has changed over time. (8 marks)
pre-basel – balance sheet capital, basel 1,2,3.
Basel 3 leverage ratio also balance seet capital.
Use table or figure if needed
c. Explain the difference between Common Equity Tier 1, Additional Capital Tier 1 and Tier 2 regulatory capital. Which type of regulatory capital do regulators prefer and why? (8 marks)
+/- 450 words total at least 6 acdemic sources
Question 2:
a. Provides two graphs for (1) tier 1 regulatory capital ratio and (2) total regulatory capital ratio during the 2007-2015 period using Bankscope data accessed via the library’s website. Please include the four (4) major Australian banks and two (2) UK banks which are HSBC Bank and Barclays Bank. (4 marks)
the data is on the excel file.
b. Interpret the capital risk of these banks. Which bank holds the lowest level of regulatory capital against their total assets? Why is that the case? (8 marks)
+/- 500 works at least 3 academic sources
Use table 2 table, 1 for tier 1 ratio and 1 for total capital ratio
Compare banks, which has lowest/highest risk?
Compare to rregulatory requirement.
Question 3:
In the 2015 Commonwealth Bank Annual report, a comparative graph of CET1 ratios is provided on page 25. Explain how the Commonwealth Bank went in relation to the other banks that you graphed in question 2a. (8 marks)
Balance sheet capital should be understood as equity capital or the shareholder
equity section on the balance sheet.
3. How many graphs do we have to draw in question 2a?
Regarding question 2a of your assignment, you are required to provide 2 graphs:
Graph 1: tier 1 regulatory capital ratio of ALL 6 required banks (including 4 major
Australian banks, HSBC Bank and Barclays Bank) during the 2007-2015 period.
Graph 2: total regulatory capital ratio of ALL 6 required banks (including 4 major
Australian banks, HSBC Bank and Barclays Bank) during the 2007-2015 period.
4. Other than the two graphs required in question 2a, am I allowed to provide more
graphs to support my arguments?
5. Question 2b requires us to interprete the capital risk of the banks. How should I
go about it?
In order to provide intelligent interpretation, you should follow the process of financial
analysis and analyse the ratios based on comparison with
trends, targets and peers. You should also validate your arguments using other
measures.
6. Question 2b requires us to find which bank holds the lowest level of regulatory
capital against their total assets and explain the reasons. Where can we find the
information to answer this question?
You will need to download the data for regulatory capital and total assets from
Bankscope to answer this question. The answer for this part of the question does not
directly come from your graphs in question 2a as the tier 1 regulatory capital ratio
and total regulatory capital ratio are calculated against the total risk-adjusted assets,
not the total assets.
You should explain how your conclusion is similar or different from what you observe
in question 2a and what might be the reasons for that similarities or differences. You
should also use other measures (which can be either downloaded directly from
Bankscope or calculated yourself) or academic resources to support your arguments.
7. With regards to question 3, I find the CBA annual report 2015 a little bit
confusing. On page 25 it shows an international CET1 ratio comparison of 12.7%
but on page 27 in the report, it shows a CET1 ratio of 9.1%. based on APRA
measurement of capital adequacy.
Please read carefully the “Capital” section (pp.25 – pp.29) provided in the CBA
annual report. In order to understand clearly why CET1 capital ratio under APRA’s
prudential standards is different from CET1 capital ratio measured on an
internationally comparable basis, you might want to find some articles that explain
the adjustments to be made to the CET1 capital ratio under APRA’s prudential
standards to improve international comparability
B. PRESENTATION
Your assignment should be professionally formatted. It is up to you how you would
like to structure your assignment. A report format is optional, but not required.
3. Are we required to draw a line chart for questions 2a? Are they graphs that show
the ratio on the y-axis and the timeline on the x-axis?
There is no requirement regarding the type of chart that you should provide in your
assignment. The line charts that you mentioned are fine as long as (1) they show the
information required, (2) their axes are labelled properly, and (3) their names and
data source are provided.
