Question

1. A depository institution that has the following assets with weights as indicated:

$875 million in commercial loans with one to three years maturity (100%);

$105 million in long term treasuries (0%);

$635 million loans secured by 1-4 family first mortgages (35%);

$12 million cash items in collection (20%);

$200 million in cash and reserves (0%);

$500 million in mortgage backed securities guaranteed by US government agencies (20%);

$285 million in multifamily mortgages (50%);

$250 million in consumer loans (100%);

$65 million in state and local governments bonds (20%); and

$25 million in loans that are 90 days or more past due (150%).

b. How much Tier 1 capital must the depository institution have to be considered adequately capitalized?

Answer 1

As per the Federal Deposit Insurance Act, an adequately capitalised Tier 1 institution should have core equity capital to risk-weighted assets ratio of minimum 4%.

From the information provided in the question, we have formulated the table below to calculate the total risk-weighted assets of the depository institution, which come to $1642.65 million.

Assuming that the depository in question maintains the minimum core equity to risk-weighted assets ratio, i.e. 4%, we get the core equity amount as = (1642.65/4)*100 = $41066.25 million.

THEREFORE, WE CAN CONCLUDE THAT THE DEPOSITORY INSTITUTION MUST HAVE $41066.25 MILLION TIER 1 CAPITAL TO BE CONSIDERED ADEQUATELY CAPITALIZED.

Sr.no.	Asset-type	Amount	Risk % (Weight)	Risk-Weighted Asset
	(A)	(B)	(C)	(D) = (B)*(C)
		(in million $)		(in million $)
1	Commercial loans with 1-3 years maturity	875.00	100%	875.00
2	long term treasuries	105.00	0%	0.00
3	Loans secured by 1-4 Family first mortgages	635.00	35%	222.25
4	Cash items in collection	12.00	20%	2.40
5	Cash and reserves	200.00	0%	0.00
6	Mortgage backed securities gauranteed by US Government agencies	500.00	20%	100.00
7	multi family mortgages	285.00	50%	142.50
8	consumer loans	250.00	100%	250.00
9	State and local government bonds	65.00	20%	13.00
10	Loans that are 90 days or more past due	25.00	150%	37.50
	TOTAL	2952.00		1642.65