QUESTION 2a [10 marks]
In corporate finance the leverage ratio can be calculated by dividing capital by book value of assets. How have regulators altered this ratio to determine the capital adequacy requirements for banks or authorized depositor institutions? Compare Gorajek and Turner (2010)[1] analyses to those presented in Lange et al. (2015), Chapter 18. In your discussion consider the tension between the bank and the regulators.
[1] The article by Gorajek and Turner (2010) is located at the end of the test.
AUSTRALIAN BAKE CAPITAL AND THE REGULATORY FRAMEWORK the bary driver of incroom to the Auntualun bending The wirt of these intuitive in ingetting Tier 1 victor's Tier I capital in the early 1920; a well capital was somewhat offut by a the in deductions Having reported sold profits throughout the turmoil partly because a number of soquittions generated the Asurion banking sector win aho able to new goodwil through the purchase price exceeding generate Tier 1 capital organically through incronies the book value of multi There was sho a $1 billion in ruled earrings Some banks supported this fall in the outstanding amount of Tier 1 convertible process by making cuts to the coral whe of securities The Srancid crash hat highichard thet dividend payments, which contributed to higher there can be wong duincentives for banks to urge ruined earrings than would have otherwise boon them as loss absorption took to they have become the cave (Graph D). less highly regarded as source of bankruptcy protection by markets and regulators The BCBS has Graph ] signalled that the waton of these securities is being Major Banks' Dividend Payments" reviewed in forthcoming section to internalond With a number of government overan having recently dermorstarted their willingness to thore-up banks' balance sheets before their Ther ? capital wakes lowes, markets we sho placing Irs emphasis on this form of capital. Most notably the outstanding balance of Austinlun banks' term webordrated debt has bailen by around $18 billion unce September 2008, after song huance in the eirier part of the decide Exposures to risk The Auntulun banking sector's soul risk-wrighted Graph 4 ansets move by $163 bilion, or 12 per cant, bom Domestic Bank Credit' September 200# to Much 2010. There was a $1 1 3 billion five in the change for wicket rhi with the Bill charge running at a fruit of mom in long term interest rates from early in 2009 and the northton of pint He quiet. The operational risk churge rose by $113 billon Partly countreacting there didi was a $66 billion ball in credit risk weighted awets. One reason for the decine is the relatively low growth in Australian banking sector kinding over the period in banks tightened their lending standards and buthewes worked to reduce their leverage" The uctor's total dometic cards has grown it in mraised made of 45 per cent since September 200k compared with an average of around 14 per cent over the previous live your Graph 4. The hai sho been I BELIEVE BANE OF AUSTRALIAAUSTRALIAN BANE CAPITAL AND THE REGULATORY FLAMINOLE a thit in the corporation of banks'loin porticlos Graph S towatch housing lending which typicaly attach Counterparty Default Probabilities" much lower the weighty thin buiness and penoral lending, The amount of bark off-balance sheet credit commitments has been failing recently as weil. The slower growth in credit and the change In it's compostion are similar to the pattrem of the early 19203 motion, when didt growth of the Auntunion banking unctor fell significantly and LA the theme of code devoted to housing incround strongly. Conde rhiwrighted diets, though from December 1920 to December 1941. There icent we and compositional hinges to burk lending have been partly affect by an incomeor In the merge he wight of banks' bainey mapocure For the mujer bark, whone cards thi weights one derived wing indeed modek, cutmate Indudes enhancing a bank's capacity to abjob of the average probability of delet for large lowmi on a going concern butk such that more corporate countreportin isorused by mound th of of its They 1 capital b in the form of common one percentage point to Its per oint Kirch 9) that and quined ounings Their average probability of default risimin for reichertid mortgages have Increased only very Strengthen the the coverage of the capital homework, with more catl bring squad for slightly and remain at a little over I per cent. There courtruparty erode rick capowarm aching from wive sho tome rian in boss gwen deback rutiman book there categories would strengthen the mileence of individual barks and induce the the that thoris might Forthcoming Regulatory be transmitted from one imitation b aother Developments through the drivetor and branding channel With the financial gish reviling a number of Introduce a non-tha-weighted simple leverage inadequacys in the capital held by barin globally ratio requirement at a supplement to the Brell rock-weighted capital adequacy slei The stated to lighten gobd capital regulation, particularly advantages of this methodology are that i in those countries most afected by the arth. The would help contion the build up of excite BCBS has been the main dieat of International Inaage In the banking system and Introduce selserm in the area over the pril your or so and ackitional whoquah again afterspits to game has released a rumber of convitative documents uponting mujer chinges to its Bevel I capital Peckxee procyclicalty by promoting the build-up Handarch " There are several propound bary reforms of capital bullets in good times that can be home of which we now dosed to computation and domon down is periods of sirens Amed on our have aspects on which broad agreement seems to of the curent proposals, th would work in the have been muched len of a sphere wide capital surcharge that . Increase the quity, intrinational corrieency mariond authortin would put into curt when and tarppercy of the capital bans Tha they judge that there is a build-up of mystere wide rhi BULLETIN | LEFTEMBER QUARTER 3OTAAUSTRALIAN LINE CAPITAL AND THE REGULATORY FRAMEWORK bruure that can I s failed or baling bank is Conclusion around through a public sector capital injection, al of Is capital Intrumpets are capable of The Australian banking spatern has significantly absorbing lower. This Include a moqurement hocined its capital buffer against potential boom in that the contractual from of capital instruments woert your To a luge piret this has been dian slow them to be written off or converted into by the financial cites, which prompted markets. common equity Is burk b unable to support regulators and sting agencies to mappathe karl in the private mirint appropriate level and form of capital. Australian Most of there worm wil revitbly the the can't barks miponded by living comidaable amounts of Intermedition shove pre crist beech, and I will of new equity - the highest quilty lee of be Important to mare in appropriate balance capital - whin change to the growth and between the cant and the bereit of Sandal composition of ther boin portinlos Brited systems bring ubject to wonger sanduch in home in their ti-weighted meet. Unlike baris order to hep policyerclen suess this balance the in a number of other countrim, of no point was ICEs under took a druled quiretative impact study there any injection of public money hito Australian of some of these propound changes during the bank capital feit hat of 2010. APRA led Awunila's contribution National and international regulatory bodies have to thi work and comuted with Antoin basis proposed major changes to capital regulators involved in the study. APRA and the Airverve Bank which include icutting the quality cometiny the participated in thenational working groups and tramparency of the capital bite: wengthering that lock a top down' look at the capital proposal the rick courage of the capital frameworks by determining benchmarks against which they Implementing a leverage ratio and Intoduding will be judged and sewed their ligly courtrecycled captul iquferments The dough of the new global capital standach will be frulord APRA will corrider the agreed international along with other forms, Winter in the your A Trouble when Implementing the new wandach which on the buk of the bites propout would References one the first of the new inquirements in place for the part of 3013, with some longs phase in prriochs Jumpering the Andizer of fe Birling Sector for certain elements of the package. The BCBS han committed to hane drish of Bribed capital when and tramtion arrangements later this your APRA will provide further guidance on Australian Marnition arangements around that time, but currently does not expect that bris is Autolu will Working Group Airport, August need in ettithe tomtion period to most the new capital inquireti Awtellin birks ippeir to be better placed to most the new capital criteria Cerbopp 1-12 than barks in a number of other countries partly because APPS mitting capel multi are buried on a italy move commotive application of the DO BELIEVE BANK OF AUSTRALIA
