Question

Onshore Bank has $37 million in assets, with risk-adjusted assets of $27 million. Core Equity Tier 1 (CET1) capital is $1,250,000, additional Tier I capital is $480,000, and Tier II capital is $434,000. The current value of the CET1 ratio is 4.63 percent, the Tier I ratio is 6.41 percent, and the total capital ratio is 8.01 percent.

Calculate the new value of CET1, Tier I, and total capital ratios for the following transactions.

1. The bank repurchases $117,000 of common stock with cash.
2. The bank issues $3.7 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 70 percent.
3. The bank receives $517,000 in deposits and invests them in T-bills.
4. The bank issues $817,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating.

Answer 1

Answer -

As per given information,

Core Equity Tier 1(CET1) Capital = $1250000

Additional Tier 1 Capital = $480000

Tier II Capital = $434000

Total capital is

= $1250000 + $480000+ $434000

= $2164000

Risk adjusted assets = $27000000

Core Equity capital ratio = [Core equity capital / Risk adjusted assets] * 100

Tier 1 ratio = [(Core equity capital + additional Tier 1 Capital) / Risk adjusted assets] * 100

Total capital ratio = [(Core equity capital + additional Tier 1 Capital + Tier II Capital) / Risk adjusted assets] * 100

1. Answer

When bank repurchased $117000 of common stock with cash, Risk weighted assets will not change since cash has 0 risk weight and it has

Core equity Tier 1 capital will decrease to

= $1250000 - $117000 = $1133000

So,

Core Equity capital ratio = [Core equity capital / Risk adjusted assets] * 100

Core Equity capital ratio = [$1133000 / $27000000] * 100

Core Equity capital ratio = 4.19%

Tier 1 ratio = [(Core equity capital + additional Tier 1 Capital) / Risk adjusted assets] * 100

Tier 1 capital ratio = [($1133000 + $480,000) / $27000000] * 100

Tier 1 capital ratio = 5.97%

Total capital ratio = [(Core equity capital + additional Tier 1 Capital + Tier II Capital) / Risk adjusted assets] * 100

Total capital ratio = [($1133000 + $480,000 + $434000) / $27000000] * 100

Total capital ratio = 7.58%

2. Answer -

Bank issues 3.7 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan to value ratio of 70%

Since risk weight of mortgage is 70%

Increase in risk adjusted assets

= 0.7 * $3.7

= $2.59 million

Total risk adjusted assets

= $27+ $2.59

= $29.59 million

Core Equity capital ratio = [Core equity capital / Risk adjusted assets] * 100

CET1 ratio = [$1250000 / $29590000] * 100

CET1 ratio = 4.224%

Tier 1 ratio = [(Core equity capital + additional Tier 1 Capital) / Risk adjusted assets] * 100

Tier 1 ratio = [($1250000 + $480000) / $29590000] * 100

Tier 1 ratio = 5.84%

Total capital ratio = [(Core equity capital + additional Tier 1 Capital + Tier II Capital) / Risk adjusted assets] * 100

Total capital ratio = [($1250000 + $480000 + $434000) / $29590000] * 100

Total capital ratio = 7.31%

3. Answer -

Bank receives $517000 and invest in T bills

Since T-bills are riskless, there will be no change in risk adjusted assets

Therefore all the three ratios remain the same.

So,

CET 1 ratio = 4.63%

Tire 1 ratio = 6.41%

Total capital ratio = 8.01%

4. Answer -

Bank issues $817000 worth of common stock and lends it to finance a new shopping mall. Developer has A+ credit rating.

Core equity capital increases to

= $1250000 + $817000

= $2067000

Tier 1 capital increases to

= $2067000 + $480000

= $2547000

Total capital increases to

= $2067000 + $480000 + $434000

= $2981000

Since credit rating is A+, loan risk weight is 50%.

Risk adjusted assets will become

= $27000000 + (0.5 * 817000)

= $27408500

Core Equity capital ratio = [Core equity capital / Risk adjusted assets] * 100

CET1 ratio = [$2067000 / $27408500] * 100

Core Equity capital ratio = 7.54%

Tier 1 ratio = [(Core equity capital + additional Tier 1 Capital) / Risk adjusted assets] * 100

Tier 1 ratio = [$2547000 / $27408500] * 100

Tier 1 ratio = 9.29%

Total capital ratio = [(Core equity capital + additional Tier 1 Capital + Tier II Capital) / Risk adjusted assets] * 100

Total capital ratio = [$2981000 / $27408500] * 100

Total capital ratio = 10.87%