There were bouquets for insurance companies but brickbats for banks from the Australian Prudential Regulation Authority this week on the extent of their leverage and the quality of their capital base. APRA had a warning for each class of institution, however, over the temptation to boards and management to give in to the short-term demands of equity investors to return capital that ought to be retained for the benefit of policy holders.Charles Littrell, APRA's head of policy, on Wednesday told a conference organised by Insto magazine that "in the past decade the larger regulated entities have become more proactive in their capital management. This has changed the composition of capital, and by some measures the capital strength, of Australian banks and insurance companies."Littrell directed his most pointed, if polite, remarks on this point both at the banking industry and at APRA, as industry regulator.He said that, "since 1998, APRA perceives that another trend may be working against the interests of depositors and policy holders," which he said was the increasing complexity and divergence of regulatory equity from accounting equity. Littrell said the largest banks had substantially increased their real leverage in the past eight years.He said of insurance companies, "I note in passing that the insurance industries do not exhibit this pattern. The general insurance industry has greatly improved its capital position, and nearly all this improvement has come from ordinary shareholders' funds."On the question of the tendency for banks, and to a lesser extent insurers, to return capital to shareholders, Littrell said that "on our more optimistic days (and even a prudential regulator has the odd burst of optimism), APRA views the Australian position as emblematic of better management. "On our more pessimistic days, we observe a share market and equity analyst cadre that, possibly contrary to good economic sense, views any cost cutting or retrenchment as positive news, rewards entities who can't find growth opportunities needing capital, and punishes entities who raise capital because they perceive such opportunities. "From this perspective, it is easy to wonder if listed regulated entities are under too much pressure to pare their capital to the minimum, leaving an insufficient cushion for unexpected bad times."Littrell said this pressure "extends beyond banks to insurance companies, as any market follower will attest."We seem to have found a new share market game called 'how fast can a company formerly in strife announce its improvement with a share buyback?'"The answer in APRA's experience is often 'about a year faster than should be the case'."