Question

Third Fifth Bank has the following balance sheet (in mil- lions), with the risk weights in parentheses. (LG 13-7)

Assets

Cash (0%) $ 21

Mortgage loans (50%) 50 Consumer loans (100%) 70 Reserve for loan losses (1)

Total assets $140

Liabilities and Equity

Deposits $133 Subordinated debt

(> 5 years) 1 Equity 6

Total liabilities and equity $140

In addition, the bank has $20 million in commercial direct- credit substitute standby letters of credit to a public corpora- tion and $40 million in 10-year FX forward contracts that are in the money by $1 million.

a. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel III?

b. What is the CET1, Tier I, and total capital required for both off- and on-balance-sheet assets?

c. Disregarding the capital conservation buffer, does the bank have sufficient capital to meet the Basel require- ments? How much in excess? How much short?

d. Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement? If not, what minimum CET1, additional Tier 1, or total capital does it need to meet the requirement?

Answer 1

a) Risk Adjusted Assets :
Cash	0*21	0
Mortgage loans	0.50*50	25
Consumer loans	1*70	70
Total Risk adjusted assets		95
b. CET1, Tier I, and total capital required for both off- and on-balance-sheet assets?
Standard LC
Foreign exchange contracts	20*.5	10
Potentital exposure	40*.05	2
Current Exposure	in the money	0
Total off balance sheet		12
Total risk adjusted on & off balance sheet items	95+12	107
CET1 Capital required	107*0.045	4.815
Tier 1 Capital required	107*.06	6.42
Total Capital required	107*.08	8.56
c. Disregarding the capital conservation buffer, does the bank have sufficient capital to meet the Basel require- ments? How much in excess? How much short?
Yes, the bank does have sufficient capital to meet the regulatory capital requirements. Except total capital
Tier 1capital is only $6 million, producing a Tier 1 CAR = 6/107=5.61 per cent.
Further, the common equity Tier 1 CAR = 6/107 = 5.61 per cent.
Total CAR = 7/107 = 6.54 per cent
total Capitla required 8.56 but avilable only $ 7
D)
CET1 Capital required	107*0.045	4.815
Tier 1 Capital required	107*.06	6.42
Total Capital required	107*.08	8.56