Answer 1.

Capital risk regulatory requirement :- It refers to a risk based minimum capital

requirement for financial institutions, means financial institutions have to maintain minimum
requirement of capital as set by regulations.
By compiling to this regulatory requirement it is ensured that financial institutions have
enough capital with them to sustain in a period of distress or crisis. The Basel committee on
banking supervision (BCBS) introduced Basel system in international system. Now, in 2010,
with continuous updating Basel 1,Basel 2, Basel 3 has been introduced. Further regulations
have been introduced with extensions in Basel norms. Presently, Basel 3 capital reforms are
being implemented in Australia by APRA (Australian presidential regulation authority).
Main requirement of capital adequacy norms to be maintained by banks is as follows:-
 An overall capital adequacy ratio should be more than or equal to 8% and capital
adequacy ratio , if calculated on tier 1 capital should be equal to or more than 6%

Calculation of capital adequacy leverage ratio:-

(Tier 1 capital + Tier 2 capital )/ risk weighted assets

Here-=
Tier 1 capital= core capital constisting equity capital + intangible assets+ audited
revenue reserves

Tier 2 capital = Unaudited retained earnings+ unaudited reserves + general loss

reserve

Risk weighted Assets = Banks Loan assets valued as per weight assigned to them.
ANALYSIS of Capital Adequacy Ratio of CITI bank and WESTPAC Banking
Corporation

WESTPAC BANKING
NAME OF THE BANK CITI BANK CORPORATION
DECEMBER DECEMBE DECEMBER DECEMBER
AS ON
31, 2020 R 31, 2020 31, 2020 31, 2020
PARTICULARS $M $M $M $M
TIER 1 CAPITAL 1,67,053.00 1,55,805.00 57,939.00 55,051.00
TIER 2 CAPITAL 28,906.00 25,532.00 13,791.00 11,971.00
         
TOTAL CAPITAL 1,95,959.00 1,81,337.00 71,730.00 67,022.00
         
RISk WEIGHTED
12,55,284.00 11,35,553.00
ASSETS 4,37,905.00 4,28,794.00
         
TIER 1 CAPITAL
ADEQUACY RATIO 13.31 13.72 13.23 12.84
TIER 2 CAPITAL
ADEQUACY RATIO 2.30 2.25 3.15 2.79
         
TOTAL CAPITAL
ADEQUACY RATIO 15.61 15.97 16.38 15.63

Capital adequacy of both the organisations has been calculated in the table given above. From
the figures of Capital and risk weighted assets it is clear that CITI Bank is a bigger bank.
Capital adequacy ratio for both the banks is nearly similar for TIER 1 capital and for TIER 2
capital the Adequacy ratios are better for WESTPAC banking corporation on both the year
end dates.

• Both the banks (CITI Banks and WESTPAC Banking Corporation) are having
satisfactory capital adequacy ratios. Ratio of both banks for Tier 1 capital is more than
6 % and for tier2 capital is more than 2 %.

• Total Capital adequacy ratio of CITI bank has reduced in 2020 to 15.61 from 15.96 in
2019. Tier 2 Capital adequacy ratio of CITI bank is slightly above 2 in both years.

• In case of WESTPAC banking corporation Total Capital adequacy ratio in 2020has

improved to 16.38 over 15.63 in 2019.
Conclusion:-

It can be interpreted from above study that both the banks are maintaining capital
adequacy ratio above minimum required in BASEL iii Norms and are nearly in same
range of capital adequacy ratio. Capital Adequacy ratio of WESTPAC Banking
corporation is slightly better than CITI Bank.
 Answer 2.

Liquidity risk in Banks :-

Banks have to maintain the liquidity in their system, As bank deal in most liquid
funds except deposits and provide loans. Deposits are to be repaid on demands as per the
nature of the deposits, So, to honour the demanded payment on time, bank should maintain
sufficient liquidity in their system APRA has issued norms in Basel iii for banks to maintain
sufficient liquidity . As a norm, prescribed via APS 210, banks have to maintain liquidity
coverage ratio (LCR) , where in liquidity for next one month requirement is to be kept. Banks
have also to maintain Net Stable Funding Ratio (NSFR).
Where in liquid holdings are to be maintain to manage liquidity risk over next one
year. This way short term and long term liquidity in banks is regulated.

LCR = Stock of high quality liquid assets (LHQA) / Total net cash outflow over next
30 calendar days.
LCR should be >= to 100%

NSFR = Amount of stable funding /Amount of required stable funding over one year.

NSFR should be >= 100

Liquidity Risk Analysis of CITI Bank and WESTPAC Banking Corporation:-

RATIO RELATED TO WESTPAC

STANDAR
LIQUIDITY RISK IN CITI BANK BANKING
D
BANKS CORPORATION
LIQUIDITY COVERAGE
>= 100% 118% 150%
RATIO (LCR)
       
       
NET STABLE FUNDING
>= 100% N.A. note 1 122%
RATIO
       

Note 1.
In USA Disclosing NSFR ia applicable from july 1, 2021. CITI Bank in its annual
report on December 31, 2020 has said that by the time statute becomes applicable it
would maintain the desired NSFR Ratio.
 Source:- 1. CITI Bank annual Report 2020 from www.citigroup.com

CONCLUSION :- WESTPAC has been able to sufficiently cover its liquidity risk by
maintaining the Liquidity Coverage Ratio 150% well above the standard 100%, and Net
Stable Funding Ratio (NSFR)of 122% well above standard of 100%.

While City Bank is able to maintain LCR at 118% on December 31, 2020 and has not
disclosed NSFR saying that as per American statute the disclosure of NSFR is applicable
from July 1, 2021 and CITI Group would be able to maintain the ratio by then.

So in case of Liquidity risk it can be said that WESTPAC has more efficiently and
successfully address Liquidity Risk regulations and maintained better liquidity.
 Answer- 3
Credit Risk:- Credit risk for banks means the risk of not getting bank the mount
funded as loans, If a bank has high credit risk than viability and sustainability of the bank is
under a red flag, In Basel iii norms risk weights are assigned to assets of the bank, a zero risk
weights is given to safest assets and 100% weights are give to most risky assets.
If loan assets are backed by proper security or property mortgage then risk associated
with those loan assets is less in comparison to the unsecured loan assets without any
mortgage or other security. So more risk weight is assigned to unsecured loans given by the
banks and less risk weight is given to loan assets backed by mortgage of property like home
loans where house purchased by the customer is kept as a security.
So as the risk involved with the assets recovery increases more weight is assigned to
assets and loan assets.
Credit Risk of a bank is directly proportional to Risk Weighted Assets of the Bank.
More the Risk Weighted Assets of a bank more is the credit risk. Credit risk of a bank is
associated with Capital risk regulatory requirement. As Capital Adequacy Ratio as discussed
in Capital risk regulatory requirements ( topic no. 1), The Capital Adequacy ratio is inversely
related to Risk Weighted Assets of the bank. It means more the Risk Weighted assets of the
bank , more Capital is needed for maintaining regulatory capital adequacy ratio. Or it can be
said that the increasing Risk rated assets of the bank would result in decreasing the Capital
Adequacy ratio. So if Credit Risk of the Bank increases, it will give rise to more capital
adequacy risk. So it proves that risks in banking system are inter related. Rise of one risk
increases the probability of another risk also.

Credit Risk Analysis of CITI Bank and WESTPAC Banking Corporation:-

As discussed above, the credit risk of banks is denoted by Risk weighted assets. So for Credit
risk analysis of both banks their Total Risk Weighted Assets are to be compared.

Total Risk weighted Asset

NAME OF THE BANK 2019 2020 %
INCREASE
OVER LAST
YEAR
CITI BANK 11,35,553.00 12,55,284.00 10.54
WESTPAC BANKING 4,29,794.00 4,37,905.00 1.89
CORPORATION
Total Risk Weighted Assts of CITI bank are more than risk weighted assets of Westpac
Bank.It can be understood as CITI bank is biiger in terms of quantum of figures in balance
sheet and Income Statement.

In 2020 Risk weighted Assets for both the banks have increased from 2019. But % of change
in the risk weighted assets in Westpac Banking corporationis ony 1.89 % towards higher side,
while in case of CITI Bank the corrospoinding figures of 2020 are more than 10.54%. Means
CITI Bank managemnent should take care in loans disbursal, credit appraisal and Loan asset
recovery.
 Answer -4
Interest rate risk:- interest rate risk in banking book is usually termed as( IRRBB) is
the current or potential risk. for interest bearing and the capital of the bank which
arises as a result of adverse movement of the interest rates. As a result banking book
position is affected with a change in interest rate, there is a change in present value of
various Assets and liabilities of the bank. In case of banks assets, liabilities, income,
expenditures, as all are sensitive to interest rate changes, and assessment of their
values depends on the rate of interest in banking book.
Interest rate risk is measured through specialised techniques like Repricing
Schedule involving gap analysis and assigning weights to duration etc., another
technique mainly used to calculate interest rate risk in banks is Simulation Approach.
For monitoring of interest rate risk bank’s authorities should periodically monitor
bank’s exposures to interest rate risk. Majority of positions and cash flows in different
time bands should be recorded in system and analysed.

Interest Rate Risk Analysis of CITI BANK and WESTPAC Banking Corporation:-

Total Risk weighted Asset

NAME OF THE BANK 2019 2020 % INCREASE
OVER LAST
YEAR
CITI BANK 3,831.00 5,561.00 45.16
WESTPAC BANKING 500.00 9,124.00 1,724.80
CORPORATION

From the information above it is observed that Westpac Banking Corporation's Interest Rate
Risk in 2020 has increased to nealy 18 times of its interest rate risk calculated in 2019. For
CITI Bank also the interest Rate Risk has increased by 45% over one year.

Authorities of both banks should monitor the Bank's exposure to interest rate risk and through
techniques of Repricing Schedules and simulation the factors and gaps should be found and
then these factors should be tracked and monitored.
Answer 5- Reputation risk of banks:- It is the risk of bank’s reputation in perception of
various stakeholders like counter parties, investors , depositors, customers taking loans ,
analysts like rating agencies , regulators and the government.
More over if any type of risk in bank increases , whether it is capital adequacy risk , liquidity
risk, credit risk or interest rare risk , then it gives rise to reputational risk of the banks .
Similarly , reputations risk due to unethical practices or a failure to monitor money
laundering and other prohibited or regulated transactions gives rise to other type of risks of
credit , liquidity, capital adequacy or legal risk. On receiving any negative information about
bank in news media or social media the stake holders start maintaining a distance in entering
into new transactions. Regulator and Government agencies get cautious and start various
audits and investigations along with imposing many restrictions and checks. Assessing the
Reputation risk in banks is more of a subjective matter and strict monitoring of all risks
through risk management system and following best and ethical practices for customers and
other stake holders along with strict monitoring of transactions as per regulations is the key to
address reputation risk in the Banks.
Recent example of Reputation Risk in Westpac Banking Corporation :- Recently
westpac was in news for bad reasons like breacching anti-money laundering rules for more
than 23 million time and the quantum of transactions where westpac has not followed
guidelines and failed in monitoring was more than $ 11 billion. A huge penalty of $ 1.3
billion was imposed on westpac.

source:- www.abc.net.au

Recent example of Reputation Risk in CITI Bank:- CITI bank was also in news for bad
reasons as the Federal Reserve and the Office of the Comptroller of the Currency commented
that Citi bank has been engaged in unsafe and unsound banking practices and has failed in
fixing the issues identified over a long d of many years. It is a longstanding failure of citi
bank to efficiently implement risk management system.

Sourcehttps://www.nytimes.com

Conclusion:- Both the banks should ensure highest level of monitoring for effective risk
management system so that Reputaional risk may be minimised.

References:-

APRA. (2020). APRA Explains: Liquidity in banking | APRA. Https://Www.Apra.Gov.Au.

https://www.apra.gov.au/apra-explains-liquidity-banking
BIS. (2019). SRP30 - Risk management. Https://Www.Bis.Org.

https://www.bis.org/basel_framework/chapter/SRP/30.htm

Doran, M. (2020, September 24). Westpac settles AUSTRAC money laundering case with

$1.3 billion fine. ABC News. https://www.abc.net.au/news/2020-09-24/westpac-

settles-austrac-money-laundering-case/12696438

Flitter, E. (2021, February 10). Citigroup is fined $400 million over ‘longstanding’ internal

problems. The New York Times.

https://www.nytimes.com/2020/10/07/business/citigroup-fine-risk-management.html

The Net Stable Funding Ratio: Definition and impacts on the financial sector. (2021,

September 24). Https://Www.Sia-Partners.Com. https://www.sia-

partners.com/en/news-and-publications/from-our-experts/net-stable-funding-ratio-

definition-and-impacts-financial