A Bank has the following balance sheet (in millions), with the risk weights in parentheses. Assets...

A Bank has the following balance sheet (in millions), with the risk weights in parentheses.

Assets				Liabilities and Equity
Cash (0%)	$	19			Deposits	$	171
Mortgage loans (50%)	$	65			Subordinate debt (>5 years)	$	8
Consumer loans (100%)	$	115			Equity	$	16
Reserve for loan losses	($	4	)
Total Assets	$	195			Total Liability and Equity	$	195

In addition, the bank has $30 million in commercial direct-credit substitute standby letters of credit to a public corporation and $30 million in 10-year FX forward contracts that are in the money by $2 million.
1- What is the common equity Tier I (CET1) risk-based capital ratio?
2- What is the Tier I risk-based capital ratio?
3- What is the total risk–based capital ratio?

Expert Solution

1.

Common equity tier 1 is a component of tier 1 capital and consists of common stock. Here as per the balance sheet the equity capital of the bank is $16 million and there is a reserve for loan losses amounting to $4 million the total of the two would give the CET1.

CET 1 ratio is calculated by divding CET 1 by risk weighted assets as follows:

CET 1 ratio = CET1/ RWA = (16+4)/(65+115) = 11.11%

2.

Tier 1 capital is the total of bank's tier 1 capital which includes all the banks common equity and other innovative securities which can form part of the bank's equity based on a trigger event. In the above case, The banks tier 1 capital is the total of common stock, reserve for loan loss and $2 million for FX forward contracts being in the money.

Tier 1 risk based ratio is calculated by dividing bank's tier 1 capital by risk weighted assets as follows;

Tier 1 risk based ratio = tier1 capital/ RWA = (16+4+2)/(65+115) =12.22%

3.

Total risk based capital ratio of a bank is calculated by adding tier 1 and tier 2 capitals and then dividing by risk weighted assets as follows:

Total risk based capital ratio = (16+4+2+8)/180 = 16.67%

ekkarill92 answered 1 year ago

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