Capital Adequacy

CAPITAL ADEQUACY
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CAPITAL ADEQUACY  Answer a Capital adequacy focuses on a company’s capital ratios. Indeed, its primary ratios are total equity assets, total average assets, and the Australian Prudential Regulation Authority (APRA) Basel III. APRA Basel III consists of the common equity tier (CET) 1, total capital ratio, and tier 1 ratio. Westpac is the first and oldest bank in Australia, which was established in 1817. Based on Westpac’s 2020 annual report, the following are the primary capital adequacy percentages that would help to evaluate the bank’s approximate risk level:

• CET1 capital ratio – 11.23%.
• Tier 1 ratio – 13.23%.
• Total capital ratio – 16.38%.
• Total equity to total assets – 7.5%.
• Total equity to total average assets – 7.4% (Westpac Group 2020 Annual Report, 2020, p. 112).

Westpac is well-positioned to accommodate more financial risks. Since 2016, CET1 has been increasing throughout 2020. In 2016, Westpac’s CET1 ratio was 9.48%, 10.56% in 2017, 10.63% in 2018, 10.67% in 2019, and 11.13% in 2020. CET1 comprises capital components, such as retained profits, reserves, paid-up share capital, investments, retained profits in funds management subsidiaries and insurance, intangible assets, and capitalized expenses. Westpac implemented various strategies to control capital adequacy. First, the bank has an Internal Capital Adequacy Assessment Process that develops capital management strategies by taking into account the regulatory and economic requirements. Second, Westpac critically evaluates external stakeholders by using rating agencies. Third, the bank has a stress testing framework that is used to reveal potential challenges in the capital measure (Westpac Group 2020 Annual Report, 2020, p. 129). The best thing about this framework is that it simulates adverse economic scenarios to see how the bank would respond. In that light, the bank prepares in advance by setting aside appropriate resources required if such negative economic problems occur in the real-life.  Answer b Compared to 2019, Westpac had good management in capital adequacy in 2020. In 2019, Westpac’s net tier 1 regulatory capital was $55,051 million and $57,939 million in 2020. The total risk-weighted assets were $428,794 million in 2019 and $437,905 million in 2020. The CET1 capital ratio for 2019 was 10.67% in 2019 and 11.13% in 2020. The tier 1 capital ratio was 12.84% in 2019 and 13.23% in 2020 (Westpac Group 2020 Annual Report, 2020, p. 130). Based on the above capital ratio statistics, it appears that Westpac’s capital adequacy keeps improving for the best. The bank has an excellent management team in capital adequacy that makes it increase its capital. If the above trend continues, Westpac’s CET1 will continue to rise, which means that the bank will be ready to address capital challenges that it might experience in upcoming years. The minimum CET1 requirement by APRA is 4.5%, and the capital buffer should be at least 3.5%. Westpac has almost doubled the CET1 requirement since it has over 8% (Westpac Group 2020 Annual Report, 2020, p. 130). One of the most significant things that have helped Westpac improve its capital adequacy is the stress testing framework. Many banks fail in proper capital management since they do not have proper systems to simulate how their finances are affected by adverse economic conditions. Nevertheless, We...