Question

1. A depository institution that has the following assets with weights as indicated:

$875 million in commercial loans with one to three years maturity (100%);

$105 million in long term treasuries (0%);

$635 million loans secured by 1-4 family first mortgages (35%);

$12 million cash items in collection (20%);

$200 million in cash and reserves (0%);

$500 million in mortgage backed securities guaranteed by US government agencies (20%);

$285 million in multifamily mortgages (50%);

$250 million in consumer loans (100%);

$65 million in state and local governments bonds (20%); and

$25 million in loans that are 90 days or more past due (150%).

c. How much total Tier 1 and Tier 2 capital must the depository institution have to be considered adequately capitalized?

Answer 1

According to BASEL III,

Tier 1 equity capital must be 4.5% of risk weighted assets(RWA), Tier 1 Total capital should be 6% of RWA and TOTAL CAPITAL(TIER 1 CAPITAL+TIER 2 CAPITAL) must be atleast 8% of RWA.

RWA

=100%*$875m+0%*$105m+35%*$635m+20%*$12m+0%*$200m+20%*$500m+50%*$285m+100%*$250m+20%*$65m+150%*$25m

=$1642.65m

Tier 1 capital(total)=6% of $1642.65= $98.559m

Tier 2 capital= 2% of $1642.65= $32.853m

TOTAL CAPITAL(TIER 1+TIER 2)=8% of $1642.65m= $131.412m