Question

Question 13

1. Using the following financial information, prepare the balance sheet as at 31/12/19 for High Street Bank Plc.

High Street Bank Plc 31/12/19
Overdraft	5,000
Current Accounts	4,900
Loans	2,000
Savings Accounts	10,000
Credit Cards	1,200
Capital	1,000
Mortgages	6,000
Cash Reserves	1,500
Investments	200

2. In relation to a bank, define the term risk-weighted assets (RWA).

3. Based on the following ratios, calculate the total RWA for High Street Bank Plc, and how much capital it will need under Basel III capital adequacy requirements of 10.5%

Lending Products	£m	Risk Weighting
Overdrafts	5,000	100%
Personal Loans	2,000	125%
Credit Cards	1,200	175%
Mortgages	6,000	50%

Answer 1

a) BALANCE SHEET FOR HIGH STREET BANK PLC AS ON 31/12/19:

EQUITY & LIABILITIES: NOTES AMOUNT

shareholder's equity 1    1,000

Reserves & surplus 2 1,500

Borrowings 3

Deposits 4 10,000

Other liabilities & provisions 5

TOTAL ----------------

12,500

ASSETS:

cash in hand & balance with RBI 6

Balance with other banks, money at 7

call & short notice

Investments 8 200

Advances 9 19,100

Fixed assets 10

Other assets 11

TOTAL ----------------

19,300

NOTES TO ACCOUNTS:

3.DEPOSITS

savings account 10,000

9. ADVANCES

Over draft 5,000

Current account 4,900

Credit cards 1.200

Loans 2,000

Mortagages 6,000

---------------

19,100

a) RISK WEIGHTED ASSET(RWA):

It is a bank's asset or off balance sheet exposures, which are weighted according to risk. This asset calculation is used to determine capital requirement or capital adequacy ratio for a financial organisation. These are used to ensure the minimum amount of capital that a final organisation must held in order to reduce risk of insolvency.

b) CALCULATION OF RWA FOR HIGH STREET BANK:

LENDING PRODUCT AMOUNT % WEIGHTAGE AMOUNT

Overdrafts 5000 100 5000

Personal Loans 2000 125 2500

Credit cards 1200 175 2100

mortagages 6000 50 3000

TOTAL 12,600

CAR=Tier 1 Capital+Tier 2 Capital​ / Risk Weighted Assets

10.5 = capital(tier 1 + tier 2)/ 12,600

capital(tier 1 + tier 2) =1,32,300