Question

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The following entries (in millions of dollars) are from the balance sheet of Revendell National Bank...

The following entries (in millions of dollars) are from the balance sheet of Revendell National Bank (RNB):

U.S. Treasury bills

Demand deposits

Mortgage-backed securities

Loans from other banks

C&I loans

Discount loans

NOW accounts

Savings accounts

Reserve deposits with Federal Reserve

Cash items in the process of collection

Municipal bonds

Bank building

$35

65

30

8

67

5

42

10

8

10

5

4

What is RNB’s capital/asset ratio? Assuming the capital requirement is 10%, does the bank meet the requirement? Show your work. (20 points)
What is RNB’s capital/risk-adjusted asset ratio given the risk factors below? Assuming the capital requirement of this ratio is 25%, does the bank meet this requirement? Show your work. (20 points)

Reserves: 0

Securities (Mortgage-backed): 0.5

Securities (Municipal bonds and Treasury bills): 0.1

C&I loans: 0.8

Expert Solution

a. RNB's Capital/asset ratio:

The following are assets of the bank: (in $ Million)

U.S. Treasury bills	$35
Mortgage-backed securities	$30
C&I loans	$67
Discount loans	$5
Cash items in the process of collection	$10
Municipal bonds	$5
Bank building	$4
Total Assets	$156

The following are liabilities of the bank: (in $ Million)

Demand deposits	$65
Loans from other banks	$8
NOW accounts	$42
Savings accounts	$10
Reserve deposits with Federal Reserve	$8
Total Liabilities	$133

Equity = Total Assets - Total Liabilities = $156-$133=$23 Million

Capital Asset ratio = Capital/Total Assets

Capital includes Equity (knows as Tier I capital) and also any reserves maintained by the bank (known as Tier II

capital)

Thus, Capital = Equity + Reserve deposits with Federal Reserve = $23+$8 = $31

Thus, Capital Asset ratio = Capital/Total Assets = $31/$156 = 19.87%.

Capital requirement is 10% and with Capital Asset ratio at 19.87%, the bank meets the requirement.

b. RNB's capital/risk adjusted assets:

To arrive at the risk adjusted asset, we need to calculate risk weighted asset by applying the risk factor against each of the asset. Wherever, risk factor is not mentioned, that is for Discount loans, Cash items in the process of collection & Bank building, the risk factor for these assets will be taken as 0 as there are no risk.

Risk adjusted asset = $72.6 as per below:

	Value	Risk Factor	*Risk Adjusted assets (Value Risk Factor)**
U.S. Treasury bills	$35	0.1	$3.5
Mortgage-backed securities	$30	0.5	$15.0
C&I loans	$67	0.8	$53.6
Discount loans	$5	0	$0.0
Cash items in the process of collection	$10	0	$0.0
Municipal bonds	$5	0.1	$0.5
Bank building	$4	0	$0.0
Total Assets	$156		$72.6

RNB's capital/risk adjusted assets = Capital / Risk adjusted asset = $31/$72.6 = 42.70%

Capital requirement of this ratio is 25% and with Capital Risk adjusted Asset ratio at 42.70%, the bank meets the requirement.

jeff jeffy answered 1 year ago

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