Importance of a Financial Institutions - Essay Example

Capital Risk Name: Institution: Introduction Financial institutions form an important part of any economy across the world. For instance,the financial system creates a link between those who have saving and those who need capital to fund their businesses (Alan, Hunt, & Hodgetts, 2011). The financial system also facilitates trade, and provides products that deal with risk and uncertainty(Alan, Hunt, & Hodgetts, 2011). Like other countries in the world, banks form a significant part of the entire financial system.In Australia, banks account for about half of all the assets held by the financial system (Australia Prudential Regulation Authority (APRA), 2006). Given the important role played by banks in the financial system and the wider economy, it is crucial that the firms remain solvent in the short run as well as in the long run. This was exemplified during the recent economic recession that was blamed on the risk attitudes held by various investors and banks (Verick & Islam, 2010).As a result of the recession that caught many by surprise, it has become more and more important that strict regulatory laws be applied. This is aimed atensuring that the economic impacts of using public funds to help banks out of bankruptcy do not become a repeat event. One of the measures taken to regulate banks against insolvency is throughcapital risk measures. The reason behind using a bank’s capital as the basic measure is because it represents that part of equity that can withstand losses without the bank becoming insolvent (Gorajek & Turner, 2010). The Australian Prudential Regulation Authority (APRA) sets out two levels of assessing the capital adequacyof a bank and these are the Tier 1 and Tier 2 levels. The APRA defines Tier 1 capital as common equity capital that is made up of (Australia Prudential Regulation Authority, 2013): the ordinary share, retained earnings, undistributed current year earnings, accumulated other comprehensive income and other disclosed reserves, minority interests, and Any other regulatory adjustments on common equity From the list above, it is clear that the sources of capital mentioned have a residual claim in bankruptcy.It is important to note that the summation of these items includes the amount of goodwill accorded to the firm. In the event that the firm suffers insolvency, then goodwill is likely to be reduced or even eliminated. Therefore, when calculating the amount of capital held by a bank, goodwill is deducted to arrive at the fair value of capital and to reflect the true position of the firm.That is to mean that should the firm fall into insolvency, these are the items that will be exhausted first before other sources of capital are utilized. Should they not be sufficient to pay up the bank’s debts, then the firm resorts to using Tier 2 capital. Tier 2 capital is defined as that capitalthat capital fall short of being defined as Tier 1 capital but they are also important in absorbing losses (Australia Prudential Regulation Authority, 2013). These items are subordinate to depositor’s seniorclaims but superior to the line items mentioned above. As such, they mainly include debt items such as long-term subordinated debt instruments, preference shares that do not satisfy Tier 1 conditions as well as other forms of funding not included in Tier 1 but must be back to the investor in form of cash (Australia Prudential Regulation Authority, 2013). With the events that occurred soon after some systematically important financial institutionswent into liquidationduring the 2007/2008 recession, the Basel Committee found it necessary to improve the regulation of financial institutions around the world. One of the key outcomes was the raising of the capital ratio from 2% to a minimum of 4.5% (KPMG LLP, 2011). This means that the eligible capitalwas reduced when compared to Basel II while there was an increase in the risk-weighted assets used in determining the capital ratio (KPMG LLP, 2011).The impacts of these new requirements are expected to be evaluatedin the paper that illustrates how some Australian banks are responding to the new capital requirements. Analysis The adoption of Basel III requirements byAustralianfinancial institutions brought a raft of changes inhow the capital risk is assessed.One significant change from previous requirements was the unification of capital ratios into three. These are the minimum common equity ratio, minimum Tier 1, and the minimum total capital ratio. These ratios are calculated as discussed below. Where RWA = Risk-weighted assets However, during the transition period some banks still use Tier 2 ratio to assess their capital risk exposure. This is calculated as: These ratios are a mandatory disclosure for all banks and they must be contained in their public releases, such as annual financial reports.For the purpose of this study, National AustraliaBank (NAB),and Bendigo, and Adelaide Bank (BAB) were selected for analysis. A snap shot of basic financial information related to capital risk has been summarized in Table 1. NAB Bendigo Bank Capital 2013 2012 2013 2012 Ordinary share capital 23,006.00 22,459.00 3,758.00 3,681.00 Dividends paid 4,148.00 3,880.00 242.50 229.00 Profit for the year to owners of the company 5,452.00 4,082.00 352.30 195.00 Reserves (1,420.00) (2,850.00) 108.10 72.20 Goodwill 7,841.00 7,246.00 1,518.20 1,548.20 Risk-weighted Assets Credit risk 314,674.00 314,813.00 Market risk 5,191.00 4,435.00 Interest risk 7,464.00 4,021.00 Total 327,329.00 323,269.00 30,530.20 28,310.10 Common equity Tier 1 ratio 8.43% 7.90% 7.82% Tier 1 ratio 10.35% 9.79% 9.25% 8.39% Total capital ratio 11.80% 11.58% 10.71% 10.41% Figure 1: Capital risk measures Sources: (Bendigo and Abelaide Bank, 2013; National Australia Bank Limited, 2013) A number of observations can be deduced by observing Figure 1. One is that NAB has a far larger amount of capital on the face value. With issued share capital amounting to over twenty three billion Australian dollars, NAB dwarfs BAB’s share capital of three billion dollars. Over the last two years, NAB has increased its issued share capital by a billion Australian dollars, representinga 5% increase. On the other hand, BAB has increased its share capital by AUD 76 million representing a 2% increase year on year. These increases in a Tier 1 capital component is not surprising considering that the APRA has continually required that financial institutions in the country continue to increase the amount and quality of Tier 1 capital. It also reflects a vibrant capital market that has allowed these firms to issue more of their shares despite a gloomy economic outlook.The difference in the amount ofincrease in issued capital is a true reflection of the nature of business conducted by these firms. While NAB is a true multinational operating in Australia, New Zealand, and the UK, BAB can be considereda significant community bank that is largely based in Australia. In terms of capital risk, the implication of the nature of business is that NAB is exposed to more systematic failures than BAB is. Therefore, the nature of risk faced by these two firms is different and can only be compensated by a difference in the amount of ordinary share capital issued. Increase in capital also shows that the two banks are moving towards strengthen their balance sheets tomeet to requirements set out under Basel III. With ordinary share capital forming a large portion of Tier 1 capital, it is not doubt that an issue of more shares will have a positive effect on the overall common equity ratio. In an effort to boost their retained earnings, both firms increased their dividends by less than one percent. This is despite their incomes for the year increasing by more than fifty percent over the last one year.NAB’s income for the year attributable to ordinary shareholders increased from AUD 4 billion to over AUD 6 billion in the period of one financial year. On the other hand, BAB’s income for the year attributable to ordinary shareholders increased by 80% from AUD 195 million in 2012 to AUD352 million in 2013.BAB had a higher increase in profitability riding on the back of the synergies derived from the 2007 merger with Adelaide Bank. NAB saw a slight decrease in its credit risk-weighted assets, probablybecause of declining interest rates to retail customers. Owing to the improvingeconomic conditions, it would be expected that these assets would increase. This is because improved economic conditions imply thatfewer people are likely to default on their loans unlike the case during the economic recession.However, decline in these assets was slow as they only declined bya mere 0.04%. The implication is that the credit risk has not changed much over the two years despite the bank’s loan book increasing by 4%. This could also be attributedto the diversified nature of business conducted by NAB. With increased confidence in the market, it is not surpassing that the market risk-weightedassets at NAB increased by 17%.Confidence is likely to have lowered the risk outlook from analysts within the bank. At the same time, it is likely that better exchange rates, interest rates, commodity prices and other market determinants significantly increased the value of market assets at NAB as supported by evidence from the market (Linsell, 2014). As Basel III requirements continue to be fulfilled by banks, their internal measures of risk can be said to have improved significantly. This isalso driven by increased regulatory control that has seen the APRA require that banks report to it on a regular basis. While this has proved costly for the reporting entities, it has also gone some way in ensuring that the risks taken by banks are well monitored and measures taken well in advance. As a result of these stringent controls from the APRA, the operational risk faced by NAB could have declined significantly. The result is that its assessment of issues such as theft by employees could have been lowered leading to the recognition of more assets being part of the overall operationalrisk-weightedassets. These developments could be the why assets exposed to operational risk increased from AUD 23 billion to AUD 34.7 billion, representing a 51% increase. Moreover, the reduction in overall risk appetitesby firms means that employees are better monitored on the positions they take in the market on behalf of the firm.As such, the operational risks associated with bank employees who undertook to lend without having to perform background checks have reduced. With increased market confidence and better internal controls, NAB has realized an 85% increase on its assets pegged on interest rate risks. This is the direct resultof having a long-standingpolicy where loans are spread over a long period in which case it becomes possible for interest rate movements to offset each other. Consequently, NAB was able to realize higher number of interest risk-weightedassets even as its net income from interest payments reduced. The reduction is also a precise reflection of the fact that long-term loans often attract lower interest rates than those issued for repayment over a shorter period. It is also possible that the value of the firm’s derivatives such as futures and swaps and futures increased significantly over the last one year. This could happen if NAB bet on the right options during the recession and they are just maturing to its benefit.Unfortunately, there was not enough information on BAB to carry out an analysis on individual risk-weighted assets. On an overall basis, both NAB and BAB saw an increase in the amount of risk-weighted assets. NAB’s assets increased by 4.5% to stand at over AUD 362 billion. On the other hand, BAB’s assets increased by 7.8% to amount to AUD 30 billion. BAB could have experienced a higher increase in the amount ofassets owing to the local nature of its business. Keeping its operations local means that it is not subjected to the vulgarities experienced or associated with overseas operations. Moreover, BAB can monitor some of its operations in a better manner than NAB, which is a multinational. However, despite these advantages, BAB seems to have a lower Basel III rating based on the calculation of inclusive ratios. From the financial statements, NAB has set a minimum common equity Tier 1 ratio of 7.5%. However, as result of its strict control of tier 1 capitalthrough share issues and dividend payments, the firm has exceeded its limits to have a common equity Tier 1 ratio of 8.43%.Compared to 2012, this was improvement of 56 basis points.This means that its capital risk has reduced by the same number of basis points. On the other hand, BAB achieved a common equity Tier 1 ratio of 7.82%. As the bank recently adopted Basel III requirements, it does not have the previous year’s figure. However, compared to the minimum ratio of 2%, BAB can be said to be safe in terms of capital risk. It also means thatit has higher capital risk exposure as compared to NAB. This is influencedby the fact that NAB has access to a wider market of raising capital. At the same time, it has higher income derived from its diversified lines of business. With a Tier 1 ratio of 10.35%, NAB is well above theminimum ratio of 4.5%. Moreover, this is an increase from the previous year’s ratio of9.79%. Thismeans that the banks, capital risk position is gradually improving to reflect the measures taken to ensure that it remains to be a going concern.BAB is also not doing badly as it has a Tier 1 ratio of 9.25% with similar implications. BAB’s Tier 1 ratio improved from 8.39% in 2012, illustrating that the firm is fully implementing Basel III requirements as well as the success of its internal policies geared towards increasing the quality of Tier 1 capital. With the minimum total capital ratio set at 8%, NAB and BAB have exceeded this requirement. NAB had a total capital ratio of 11.8%, a rise from the previous year’s ratio of 11.58%. On the other hand, BAB had a total capital ratio of 10.71%, up from 10.41% recorded in 2012. These ratios continue the script of proper capital risk management at both firms. It also gives a success story for the regulators who have ensured that banks do not engage in risky investments that dilute their ability tocontinue operating as going concerns. Conclusion As a bank that operates across borders where systems are more complex, NAB has ensured that its capital risk position is not diluted by declining profitability and lower interest income. The first step for it was to set up a minimum common equity Tier 1 ratio of 7.5% that is more than twice the minimum ratio established by the APRA.With a common equity ratio of 8.43%, NAB faces a lower capital risk than BAB. Despite its size and nature of operations, NAB has managed to have a better ratio than BAB’s 7.82%. However, both banks are relatively safe in terms of capital risk. With ratios ranging between 7-8%, both firms have enough capital to pay up at least 7% of the risk-weighted assets. This is further illustrated by the fact that both banks have total capital ratios ranging between 10-12%. However, of the two banks, NAB seems to be having a better risk analysis as it has managed to keep its ratios much better than those from BAB. While this could be driven by its size and scale of operations, NAB shows a more robust approach to risk analysis and disclose. Unlike BAB, NAB has disclosed all the constituents of its risk-weighted assets. Moreover, the bank has shown commitment to raising the bar on Basel III requirements by having a minimumratio.However, both banks have fully met APRA’s requirements though BAB has not disclosed as much information as NAB. On overall, both banks can be consideredcapital risk safe. References Alan, B., Hunt, C., & Hodgetts, B. (2011, August 6). The Role of Banks in the Economy - Improving the Performance of the New Zealand Banking System after the Global Financial Crisis. Retrieved from Reserve Bank of New Zealand: http://www.rbnz.govt.nz/research_and_publications/speeches/2011/4487002.html Australia Prudential Regulation Authority (APRA). (2006). Financial System Stability Assessment . Melbourne: Australia Prudential Regulation Authority (APRA). Australia Prudential Regulation Authority. (2013, January 21). Prudential Standard APS 111. Retrieved from Australia Prudential Regulation Authority: http://www.apra.gov.au/adi/prudentialframework/documents/120928-aps-111_final.pdf Bendigo and Abelaide Bank. (2013). Annual Financial Reports, 2013. Bendigo: Bendigo and Abelaide Bank. Gorajek, A., & Turner, G. (2010). Australian Bank Capital and the Regulatory Framework. Melbourne: Reserve Bank of Australia. KPMG LLP. (2011). Basel III: Issues and Implications. Delaware: KPMG LLP. Linsell, K. (2014, January 7). Banks Leading Bond Sales Surge in Europe as Credit Risk Declines. Retrieved from Bloomberg L.P.: http://www.bloomberg.com/news/2014-01-07/banks-leading-bond-issuance-in-europe-as-borrowing-costs-fall.html National Australia Bank Limited. (2013). Annual Financial Report, 2013. Docklands Victoria: National Australia Bank Limited. Verick, S., & Islam, I. (2010). The Great Recession of 2008-2009: Causes, Consequences and Policy Responses. Bonn: Institute for the Study of Labor. Liquidity Risk Name: Institution: Introduction Liquidity in business is of utmost importance. This is because having adequate cash at hand or through items that can be easily converted into cash enables a firm to pay up the most urgent of its liabilities without incurring heavy borrowing costs. However, cash at hand or even in the bank accounts can be considered costly to the business. This fact is not lost to bankers who would prefer a situation where as much cash is used in the lending business to increase the interest spread that leads to higher net interest income. However, the recent economic crisis exemplified the need for banks to have adequate cash reserves to meet the most current business needs. In the banking crisis that have plagued the world over the last one century, it has become the case that some firms having been willing to exceed the amount of loans appropriate with the deposits made with the bank. They operate under the assumption that deposits will not be withdrawn on short notice and that the bank can handle the withdrawals. However, this has often been far from the truth forcing some to go under and the regulatory authorities to intervene. In Australia, the Australian Prudential Regulation Authority (APRA) has responded by issuing Prudential Standard APS 210 (Liquidity). The most recent release of the standard is similar to the requirements of Basel III liquidity requirements. One of the key requirements of the guideline is that an authorized deposit-taking institution must maintain a quality portfolio of highly liquid assets that meet the firm’s business needs for at least the next one-month (Australian Prudential Regulation Authority, 2014). The regulatory standard also places the task of ensuring that the firm meets the necessary expectations on the hands of the board of directors. At the same time, APS 210 (Liquidity) provides that an ADI must undertake a robust analysis of its funding sources on a regular basis and report the same to the regulator (Australian Prudential Regulation Authority, 2014). As part of it mandate to have the firm under concrete liquidity risk management, the board must ensure that it meets some minimum quantitative measurements. One, the liquidity coverage ratio must be equal or in excess of one hundred percent (Australian Prudential Regulation Authority, 2014). The implication of such a requirement is that the bank’s high quality liquid assets can meet expected cash outflows for the next one month. High quality liquid assets are defined as those assets that meet the fundamental, market and operational characteristics. On an aggregate, these features include low market and credit risk, can be sold in an active and sizeable market, and are not encumbered (Deloitte Development LLC., 2013). The second requirement is that the bank must perform a name crisis scenario test that guarantees that the bank will be in operation for at least five days under adverse operating conditions (Australian Prudential Regulation Authority, 2014). Lastly, the board must conduct a going concern analysis that estimates how the business will operate under normal conditions for at least the next fifteen months. This study seeks to explore how well two Australian banks have enforced the requirements of the APS 210 (Liquidity) as well as other regulatory expectations from the APRA. The two banks are the National Australia Bank (NAB), Bendigo, and Adelaide Bank. Analysis For the purpose of this paper, the main source of information is the financial reports released by the individual banks. Figure 1 illustrates some of the information pertinent to liquidity risk derived from these annual financial statements for the year ended 2013. NAB Bendigo 2013 2012 2013 2012 Interest Income 31,311.00 34,542.00 3,073.70 3,440.80 Interest expense (17,960.00) (21,300.00) (2,046.00) (2,490.70) Gross income 13,351.00 13,242.00 1,027.70 950.10 Gross margins 42.64% 38.34% 33.44% 27.61% Loan impairment charge 1,810.00 2,734.00 69.90 32.40 Loans and advances 411,979.00 394,741.00 49,957.40 48,217.00 Cash and liquid assets 35,666.00 30,130.00 383.80 288.80 Due from other banks 43,193.00 42,018.00 293.90 272.20 Trading derivatives 39,214.00 36,027.00 31.90 48.50 Trading securities 32,996.00 29,494.00 5,465.20 4,366.10 Investments 118,116.00 106,247.00 858.80 833.20 Total assets 808,427.00 762,394.00 60,282.20 57,237.80 Liabilities Due to other banks 34,623.00 28,128.00 379.50 327.20 Trading derivatives 41,749.00 40,375.00 98.40 179.00 Deposits 446,572.00 425,629.00 47,439.00 44,572.70 Total liabilities 761,807.00 717,693.00 55,848.20 53,020.10 Figure 2: Summary of financial statements Sources: (Bendigo and Abelaide Bank, 2013; National Australia Bank Limited, 2013) Owing to the nature and size of its business, NAB naturally has a higher amount of interest income amounting to over AUD 31 billion. While high, interest income for the bank showed a 9% decrease from the previous year’s amount of AUD 34 billion. NAB’s interest expenses amounted to AUD17 billion representing a 15.68% decline. The gross interest margin in 2013 was AUD13 billion, or about 42.63%. In the year 2012, the gross interest margin was 38.34%. Therefore, NAB can be said to have controlled its interest expenses better over 2013 than it did in 2012. Meanwhile, BAB recorded a decline in the amount of interest income as it reduced from AUD 3.4 billion in 2012 to AUD 3 billion in 2013. This was a 10.67% decline. The firm’s interest costs also reduced from a high of AUD 2.5 billion in 2012 to two billion Australian dollars representing a 17% decline in interest costs. However, gross margins increased from 27.61% recorded in 2012 to 33.44% achieved in 2013. Both firms showed a decline in their main line of business, which is traditional lending. This could be attributed to the constrained economic conditions as the global economy recovers from the recession. Current interest rates are at a historic low and the decline in interest margins was observed across the market (KPMG International Cooperative, 2014). The decline in interest income was realized even as the banks’ loan books increased in size. NAB’s loans and advances increased from AUD 394 billion in 2012 to AUD 412 billion in 2013. This was a 4% increase that was not enough to offset the effects of a low interest environment. On the other hand, BAB saw its loan book increase from AUD 48 billion to AUD 49 billion, which was a 3.6% increase. As with NAB, the increase in the loan book was not enough for BAB to realize an increase in interest income. However, these amounts are always net of the impairment charge on loans and advances. Therefore, it is crucial to carry out an analysis of loan impairment charges by the two banks. The last two years have seen banks get ready to adopt the new Basel III that have been released by APRA. The result has been a significant reduction in risk appetite within firms and across the industry. For instance, it not common anymore for banks to offer loans without perfuming proper background checks. The result has been a reduction in the amount of loan defaults towards levels seen before the global financial crisis of 2007/2008 (KPMG International Cooperative, 2014). Accordingly, NAB reduced its provision for loan default by AUD924 million over the last two years. This could have been influenced by a run off in the firm’s UK real estate business and the fact that lending practices have improved over the period considered (KPMG International Cooperative, 2014). On the other hand, BAB increased its provision for loan default by 115% from a low of AUD 32 billion in 2012. This is probably because of its consumer loan portfolio in Queensland and the greater western region of Australia that markets pundits have observed to show some signs of distress (KPMG International Cooperative, 2014). Both banks saw a slight increase in the amount of deposits received from clients. NAB’s deposits increased by AUD21 billion while BAB’s deposits increased by AUD 2.8 billion. In terms of percentage gains, the increases represented a 4.92% and 6.43% for NAB and BAB respectively. With some lines of businesses coming from depression, increases in the amount of deposits is an expected result. Moreover, banks across the country have been pushing to boost the ratio of loans to deposits as the APRA expects them to implement Basel III requirements by January, 2015. On this front, NAB and BAB have been doing remarkably well. For instance, the ratio of deposits to loans for NAB rose from 1.078 in 2012 to 1.084 in 2013. While this is on gross terms, it shows that as one of major Australian banks, NAB is gearing for the adoption of new liquidity requirements set to be adopted in the next one year. Meanwhile, BAB ratio of deposits to gross loans rose from 0.92 in 2012 to 0.94 in 2013. The fact that the ratio is below one shows that that BAB might have problems adjusting to Basel II requirements on liquidity. Low amounts of deposits could be attributed to the nature of its business that shields it from markets accessible to its peers such as NAB. However, BAB has shown improvements in the ratio though it might not be enough when the new laws come into place. To assess the funding nature of all assets, one might find it prudent to consider the ratio of customer deposits to total assets. This is because customer deposits have to be funded by a line item on the liabilities and equity side of the balance sheet. For NAB, customer deposits made up 55% of all assets on its 2013 books. In 2012, deposits made up a similar amount of all assets. The implication is that the bank could fund more than half of its assets through customer deposits. In contrast, BAB’s ratio averaged 78% and this implies that the bank financed close to 80% of its assets using customer’s deposits. While BAB’s results indicate a better liquidity risk position, this is undermined by the ratio of customer deposits to gross loans. Over the financial year of 2012/2013, NAB obtained a wholesale funding amounting to AUD25 billion. The funding was obtained in various denominations and it was part of the company’s efforts to shore up its funding capabilities as set out under the proposed Basel III net stable funding ratio (NSFR). Coupled with an AUD15 billion increase in customer deposits, NAB moved closer to achieving the ideal position where it has adequate cash to fund its loan operations. On the other hand, BAB’s financial statements did not indicate any new funding. While it is not possible to deduce the reason for the reluctance to get additional funding to boost its cash position, it can be argued that BAB will have a hard time implementing many of the liquidity measures as proposed by the APRA. To test liability-side risk, one might consider the ratio of cash and cash equivalents to customer deposits. This is because the risk measures how well a bank is positioned to fulfil its obligations to customers by using the cash it has and selling all marketable securities. Under such conditions, it might not be possible for the bank to recover a significant amount of its loans to clients and it has to sell off its short-term investments to raise necessary funds. Moreover, these are high quality liquid assets whose value is not likely to be affected under normal market conditions. In the case of NAB, the cash and its equivalents accounted for about 60% of gross deposits in the year 2013. In 2012, the percentage was slightly above 57%. The increase can be attributed to an increase across all the bank’s liquid assets. In contrast, BAB ratio of cash to deposits was 14% in 2013 and 13% in 2012. Compared to NAB, BAB was at a worse off credit position. Should the bank face a catastrophe where all its depositors want their money back, BAB will only have sufficient cash to pay an average of 14% of the total demands. On the other hand, should NAB be faced by a similar crisis, the bank can pay off 60% of the total value of deposits and this places the firm in a far much better position than its rival in the market. The total liquid assets held by NAB as at the close of the 2013 financial year amounted to AUD107 billion. Compared to the previous year, this was a AUD16 billion increase in assets and continues to show that the bank is gearing to achieve the stringent controls set to be enforced in 2015. From the nature of its business, NAB benefited greatly from the appreciation of the Australian dollar as assets denominated in the currency increased by AUD10 billion. As a bank that has mortgages making up a large part of its business, NAB held retail mortgage backed securities as part of its liquid assets portfolio. These securities amounted to AUD27 billion in 2013, up from the AUD20 billion held in 2012. This implies that the bank is seeking to increase the robustness of its liquid assets portfolio to match liquidity expectations of the APRA. The banks also enjoyed credible credit ratings from the major rating agencies. For instance, its long-term debt was rated as AA- by S&P while some of its subsidiaries were rated A+ by S&P. However, Moody downgraded its subordinated debt from Aa3 to A2. Despite this, NAB’s liquid assets portfolio looks healthy for a bank its size. BAB’s total liquid assets amounted to AUD7 billion in 2013 and AUD5.9 billion in 2012. The increase is an attempt by the bank to meet the new provisions set out in the new laws. The bank also received positive ratings from the three major agencies. Moody’s rating for BAB short-term debt was at P-1 and this means that the bank has no signs of default on this kind of debt. Fitch rated its long-term debt as A- with a stable outlook while S&P rated the bank’s short-term debt as A-2. These ratings indicate that the bank has maintained a positive relation with investors and its business model is viable under current conditions. However, the bank did not disclose the amount held under each class of liquid assets though this might change with the implementation of Basel III in 2015. Conclusion NAB had a better income standing than its peer in the banking industry. With a gross interest income of 42.64%, NAB dwarfed BAB’s gross margin ratio of 33.44% in 2013. NAB also perfumed consistently better than BAB on every liquidity risk measure. Owing to better business practices, NAB reduced its provision for bad and doubtful debts by AUD924 million. This was a 33% reduction compared to the 115% increase seen on the books of BAB. This illustrates that on an overall basis, NAB is better placed to adopt the new Basel III regulations that are set to be adopted in the next financial year. BAB’s main concern would be that its ratio of deposits to gross loans is below one. This places the bank in a difficult position as the new regulations require a more robust ratio that is equal to or more than one. From the analysis conducted both BAB and NAB have met the requirements of APRA under current conditions. However, the next financial year might be a problem for BAB as it has problems meeting the stringent controls set out in the new laws set to be adopted in 2015. References Australian Prudential Regulation Authority. (2014, January 1). Prudential Framework. Retrieved from Australian Prudential Regualtion Authority: http://www.apra.gov.au/adi/PrudentialFramework/Documents/Prudential-Standard-APS-210-Liquidity-(January-2014).pdf Bendigo and Abelaide Bank. (2013). Annual Financial Reports, 2013. Bendigo: Bendigo and Abelaide Bank. Deloitte Development LLC. (2013, May 20). Assets. Retrieved from Deloitte Development LLC.: https://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Industries/Financial%20services/Risk%20and%20Regulatory%20Review%20May%202013/Deloitte_Risk_Regulatory_Review_BASEL_III_May2013.pdf KPMG International Cooperative. (2014). Major Australian Banks: Full Year Results 2013. Melbourne: KPMG International Cooperative. National Australia Bank Limited. (2013). Annual Financial Report, 2013. Docklands Victoria: National Australia Bank Limited. Read More