Question

Please view the following balance sheet for the Bank of New Providence:

ASSETS ($1,000,000s) LIABILITIES($1,000,000s)

Cash $52 Deposits $650

T-Bills and Bonds $257 Long-term Debt $326

Loans to Other Banks $95 Equity $88

Commercial Loans $364 Mortgages $296

TOTAL $1064 TOTAL $1064

The net profit for the bank was $10.3 million. The required CET1 ratio is specified at 5% of risky assets. What is the Bank’s CET1 ratio, and is it sufficient?

No; 4.9%

Yes; 11.7%

Yes; 15.9%

Yes; 8.3%

Insufficient data to determine.

Answer 1

Answer: Insufficient data to determine.

CET1 ratio = Tier 1 Capital/ Risk Weighted Assets i.e RWA

Tier 1 capital = Equity (subtract goodwill from equity) + Non-cumulative perpetual preferred stock.
RWA = Assets value * Risk Weight for the asset class

In the given problem Risk weighted haven't been provided.

The risk weights for loans to other bank, and commercial loans and mortgages vary depending on their nature.

Note: However, on a prima-facie analysis it appears that T1 Capital Ratio is sufficient.

total asset = 1064
Since Cash and T bills and T Bonds have risk weight of 0, we can subtract the values of these assets from total Assets to get RWA as: 1064- 52- 257 = 755
Equity = 88
te1 capital ratio = T1 capital / RWA = 88/755 = 11.7%

However in absence of risk weights for loans to other banks and commercial loans the RWA calculated in above step is just a mere estimation and not an accurate figure. The Risk weight for loans to other bank and Commercial loans range from 20% to 150%. Since the problem doesn't shed light on the risk weights of Loans to other bank, commercial loans and mortgages, you would need additional assumptions to justify the answer of 11.7%. (assumption being that RWA for these assets classes is 1)