Question

Q9. Capital management Third Bank has the following balance sheet (in millions), with the risk weights in parentheses ab Deposits Subordinated debt (5 years) Assets Cash (0%) OECD interbank deposits (2096) Mortgage loans (50%) Consumer loans (100%) Reserve for loan losses Total Assets L1 S21 25 70 70 (1 $185 NonCumulative preferred stock Equity Total liabilities and equity S185 The cumulative prefered stock is qualifying and perpetual. In addition, the bank has S30 million in performance-related standby letters of credit (SLCs) to a public corporation, $40 million in two-year forward FX contracts that are currently in the money by S1 million, and S300 million in six-year interest rate swaps that are currently out of the money by S2 million. Credit conversion factors follo Performance-related standby LCs 1-to 5-year foreign exchange contracts 1- to 5-year interest rate swaps 5- to 10-year interest rate swaps 50% 5% 0.5% 1.5% What are the risk-adjusted on-balance-sheet assets of the bank as defined under a. the Basel Accord? What are the Risk-adjusted Off Balance Sheet assets? b. To be adequately capitalized, what are the required CET1, Tier I, and total capital? c. Dsregarding the capital conservation buffer, does the bank have enough capital to meet the Basel requirements? If not, what minimum CET1, additional Tier 1, or total capital does it need to meet the requirement? 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

Calculate risk adiusted assets as follows Cash OECD inter bank deposit Mortgage loans Consumer loans Total risk-adiusted assets $ -1:096*21 $ 5.00|-20%"25 $ 35.001:509670 $ 70.00|-100%*70 $110.00 Off balance sheet assets Standbv LCs Foreign exchange contracts Potential exposure Current exposure Interest rate swaps Potential exposure Current exposure Total risk adiusted on balance sheet assets Total risk adiusted on and off balance sheet assets $133.50 $ 15.001:30*50% $ 2.001:40*5% $ 4.50-300*1.5% $ 2.00 $110.00 Required capital, 8% of 133.50 $ 10.68 The bank would require 6% of total on and off balance sheet assets under Tier 1, and it must be at least 8.01 million (133.50 million *0.06) Since, the bank can only have 1.5% perpetual preferred stock of total assets, which is close to 2 million, thus, the bank, requires more 1.0075 million (8.01 minus 5 minus 2.0025) of equity. Thus, the bank does not have enough capital to meet basel requirements The conservative buffer requirement will increase the requirement of common equity to 7%, and additional 2.5% common equity will be required under Tier 1. Thus, the bank would require a total of 9.345 million in common equity. Currently, the bank has only 5 million in equity, thus, it would require more 4.345 million (9.345-5). Thus, the bank does not have enough capital to meet basel requirements.