Let’s assume that you have been asked to calculate risk-based capital ratios for
ID: 2612724 • Letter: L
Question
Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts.
Cash 7 million
Government Securities: 9 million
Mortgage loans 25 million
Other loans 55 million
Fixed assets 8 million
Intangile assets 5 million
Loan-loss reserves 4 million
Owners’ equity 6 million
Trust-preferred securities 3 million
Cash assets and government securities are not considered risky.
Loans secured by real estate have a 50% weighting factor.
All other loans have a 100 % weighting factor in term of riskiness.
Calculate the equity capital ratio.
Calculate the Tier 1 Ratio using risk-adjusted assets.
Calculate the Total Capital (Tier 1 and Tier 2) Ratio using risk-based assets.
Explanation / Answer
(‘1)
Equity Capital Ratio
Equity Capital Ratio= Owners Equity / Assets.
Assets
Amount ( $ in millions)
Cash
7.00
Government Securities
9.00
Mortgage Loan
25.00
Other Loan
55.00
Fixed Assets
8.00
Intangible Assets
5.00
Total Assets
109.00
Equity Capital Ratio= 6/109
Equity Capital Ratio= 5.50 times
Tier 1 Ratio
Calculation of Risk based assets.
Exposure
Amount (Million)
Weight Risk
Risk Adjusted Base
Cash
7
0
0
Government Securities
9
0
0
Mortgage Loans
25
50 %
25
Other Loans
55
100 %
55
Total
80.00
Tier 1 Ratio= Tier 1 Capital/ Risk Adjusted Base
Tier 1 Capital
= Owners Equity + Trust Preferred Securities-Intangible Assets
Tier 1 Capital= 6+3-5
Tier 1 capital = 4
Tier 1 Ratio= 4/80
Tier 1 ratio= 5.00 %
Total Capital Ratio = (Tier 1 capital + tier 2 capital)/ Risk adjusted assets
Total Capital = Tier 1 capital + Loan-loss reserve
Total Capital= 4+4= 8
Total Capital Ratio= 8/80
Total Capital Ratio= 10.00%
Assets
Amount ( $ in millions)
Cash
7.00
Government Securities
9.00
Mortgage Loan
25.00
Other Loan
55.00
Fixed Assets
8.00
Intangible Assets
5.00
Total Assets
109.00
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