Assets Liabilities & Capital Risk Weight for Assets Reserves 10 Checkable Deposi

Question

Assets                         Liabilities & Capital                  Risk Weight for Assets

Reserves 10                Checkable Deposits 60           Reserves 0%

Tbills 5                       Saving Account 97                  Tbills 0%

Agence MBS 50           Capital 8                                 Agency MBS 20%

Loan 100                                                                     Loan 100%

Total 165                Total 165

Assume the required reserve is 10% and the capital requirement is 5%, does this bank meet the regulation on reserves and capital?

Suppose that 5% of loan is written off (loan cannot be collected). Does this bank still meet the regulation on capital?

Assume some depositors of bank A transfer $5 mil from their saving accounts to an another bank. Recommend one solution for bank A so they can comply with reserves requirement

Explanation / Answer

(1)

(i) Required reserves = Checkable deposits x 10% = 60 x 10% = 6

Since reserves = 10, the required reserves provision is being maintained.

(ii) Required capital = Loan x 5% = 100 x 5% = 5

Since capital = 8, the required Capitals provision is being maintained.

(2)

If 5% of loan is written of, Both loan & Capital fall by 5% x 100 = 5.

New required capital = 5% x New loan = 5% x (100 - 5) = 5% x 95 = 4.75

Actual capital will be (8 - 5) = 3, which is lower than required capital of 4.75. So the condition will not be met.

(3)

This transfer will reduce savings accounts by 5. Reserves will fall by 5 as well, and new reserves = 10 - 5 = 5.

One possible solution is to increase loan by 5, by engaging in higher credit lending.

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