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Onshore Bank has $27 million in assets, with risk-adjusted assets of $17 million. Core Equity Tier...

Onshore Bank has $27 million in assets, with risk-adjusted assets of $17 million. Core Equity Tier 1 (CET1) capital is $800,000, additional Tier I capital is $230,000, and Tier II capital is $414,000. The current value of the CET1 ratio is 4.71 percent, the Tier I ratio is 6.06 percent, and the total capital ratio is 8.49 percent. Calculate the new value of CET1, Tier I, and total capital ratios for the following transactions. a. The bank repurchases $107,000 of common stock with cash. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % b. The bank issues $2.7 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 70 percent. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % c. The bank receives $507,000 in deposits and invests them in T-bills. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % d. The bank issues $807,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % e. The bank issues $1.7 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % f. Homeowners pay back $4.7 million of mortgages with loan-to-value ratios of 50 percent and the bank uses the proceeds to build new ATMs. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio

Expert Solution

Sol :

Onshore bank assets - $27 million

Risk-adjusted assets = $17 million

Core Equity Tier 1 (CET1) capital = $800,000

Additional Tier I capital = $230,000

Tier II capital = $414,000

Current value of the CET1 ratio = 4.71%, Tier I ratio is 6.06%,and the total capital ratio is 8.49%.

Total capital = $800,000 + $230,000 + $414,000 = $1,444,000

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

Now,

Core equity capital ratio = Core equity capital / Risk adjusted assets.

Tier 1 capital ratio = (Core equity capital + additional Tier 1 Capital) / Risk adjusted assets.

Total capital ratio = (Core equity capital + additional Tier 1 Capital + Tier II Capital) / Risk adjusted assets.

a) When bank repurchases $107,000 of common stock with cash then, risk weighted assets will not change since cash has no risk weight.

Core equity Tier 1 capital will decrease to $800,000 - $107,000 = $693,000

Therefore Core equity capital ratio = $693,000/$17,000,000 = 4.08%

Tier I capital ratio % = $693,000 + $230,000/$17,000,000 = 4.43%

Total capital ratio % = $693,000 + $230,000 + $414,000/$17,000,000 = 7.86%

b) Bank issues $2.7 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 70 percent.

Since mortgage risk weight is 70%, increase in risk assets = $0.7%*2.7= $1.89 million

Total risk adjusted assets = $17,000,000 + $1.89 million = $18.89 million

Core equity capital ratio = $800,000/ $18,890,000 = 4.24%

Tier 1 capital ratio = ($800,000+$230,000)/ $18,890,000 = 5.45%

Total capital ratio = ($800,000+$230,000+$414,000)/ $18,890,000 = 7.64%

c) Bank receives $507,000 in deposits and invests them in T-bills.

Since T-bills are risk free, there will be no change in risk adjusted assets. Therefore all the three ratios will remain the same.

d) The bank issues $807,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating.

Core equity capital will increases to $800,000+$807,000 = $1,607,000

Tier 1 capital increases to $1,607,000+$230,000 = $1,837,000

Total capital increases to $1,607,000+$230,000+$414,000= 2,251,000

Since credit rating is A+, loan risk weight is 50%. Risk adjusted assets will become ($17,000,000+ 0.5*$807,000 = $17,403,500

Core equity capital ratio = $1,607,000/$17,403,500 = 9.23%

Tier 1 ratio = $1,837,000/$17,403,500 = 10.56%

Total capital ratio = 2,251,000/$17,403,500 = 12.93%

jeff jeffy answered 1 year ago

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