TRANSMISSION LETTER The report topic is Trends in Australian Banking Capital. The contents are as follows:1. The explanation for why "regulators usually want more equity capital while shareholders usually prefer less equity capital"2. The differences between equity capital and bank regulatory capital3. A discussion of the functions of bank capital and the role of the risk-return trade-off4. The differences between Tier 1 capital and Tier 2 capital 25. The components of Tier 1 and Tier 2 capital and the related implications in terms of costs and risks6. Details of trends in Australia's four major banks over the past five years. 1. In Hogan et al (2004) on page 249 it is stated that "from the shareholders' perspective", the appropriate amount of capital is an amount that is small enough to produce at least an adequate return on capital and yet large enough to absorb the risk. However, banking regulators have a responsibility to protect depositors' funds and the security of the financial system, which requires banks with higher credit risk to hold a higher minimum capital. The table below shows capital ratios for the four major Australian banks over the past 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 Level 1 7.43 6.96 6.78 6.51 7.49 Level 2 3.93 4.21 4.28 4.18 4.75 Total 10.25 9.73 9.8 9.16 9.75ANZ Banking Group Limited Level 1 6.9 7.7 7.9 7.5 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 Level 1 7.3 7.7 7.6 7.5 6.6 Level 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...... half of the document ......h the development of appropriate risk management techniques and problems with the definition of operational risk have caused the postponement of the initial plan which is now not will be implemented internationally until 2007. APRA, however, would like Australian banks to adopt this system in 2005. References:¡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 Regulator 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 the World of Banking¡P JK Gifford, The Australian Banking Industry