One way to work out how banks are faring under the regulatory and reporting regime known as Basel II may be to watch fluctuations in the level of risk-weighted assets. In the case of Westpac, that may be the most interesting measure in its half-year profit to March 2008. Cloaked in the measure of risk-weighted assets - and disclosed nowhere else in bank financial statements - are the bank's assessments of its credit quality. There's a lot more sensitivity in the weighting of loans, based on the bank's current credit grading, than under the prior method of working out bank capital, known as Basel I. So more favourable credit ratings can lower estimates of risk-weighted assets and bolster calculations that flow from that, including capital ratios. At Westpac, the level of risk-weighted assets fell by 35 per cent in the switch from Basel I to Basel II (using September 2007 as the benchmark). The bank thus calculated its capital ratio under the new method, for September, at 11.3 per cent, compared with a ratio of 9.5 per cent under the old method. This proves significant in the context of the credit crunch. Westpac reported growth of 20 per cent annualised in risk-weighted assets over the period and can still emerge with a total capital ratio at March 2008 of 10.1 per cent and a tier one capital ratio of 7.4 per cent. The bank's core capital, or ACE ratio, scarcely changed over the last six months (amid frantic asset growth) at 6.0 per cent. Phil Coffey, Westpac's chief financial officer, indicated yesterday that any capital management initiatives in the short term were likely to be in the form of "non-innovative hybrid" capital. He said the bank had used up 18 per cent of its potential 25 per cent limit of hybrid capital within the overall capital base allowed by APRA. The bank paid back some hybrid capital in December. The medium-term capital targets that the bank's management prefers are something left hanging for now. APRA is still discussing its own policy with Westpac, and with other banks. And APRA still has to finish refining some details of the capital regime.