Question

QUESTION 17

The bank's provisions for bad and doubtful debt amount to $20 million. The bank writes off $18 million non-performing loans.

As a result of the write off, the gross loans ___________________, the net loans _____________________ and bank's equity _______________.

	A.	decreases by $20 million; decreases by $18 million; decreases by $2 million.
	B.	does not change; decreases by $2 million; decreases by $2 million.
	C.	decreases by $18 million; does not change; does not change.
	D.	decreases by $18 million; decreases by $18 million; does not change.
	E.	decreases by $18 million; increases by $18 million; does not change

QUESTION 18

Bank A has a RWA of $5,000,000. Calculate its Basel III requirement for Tier 1 capital in order to avoid restrictions by the regulator on its future assets' growth.

Express your result in $000. You must not type $ sign or comas. You must round your result to ONE decimal when your answer is expressed in $000. If your result is $10,530 you will be required to type 10.5.

________________

Answer 1

Question 17:

Provision for bad and doubtful debts is created by debit to income account. The gross loans amount is not affected by making provision. When nonperforming assets are written off, the amount is debited to the provision account. As a result, the provision decreases and gross loans decreases. But, the net loans, which is net of provision, remains unchanged. Also, since the income account has already been charged while making the provision, the equity amount remains unchanged on write off.

In the given situation,

As a result of the write off, the gross loans decreases by $18 million, the net loans does not change and bank's equity does not change

The answer is choice C.

Question 18:

Tier 1 capital requirement, as per Basel III norms, is 10.5% of risk weighted assets (RWA).

Given, RWA= $5,000,000

Hence Tier 1 capital required (in $000’s)= $5,000,000*10.5% = 525.0