1. Second Bank has the following balance sheet in millions of dollars with the B
ID: 2617183 • Letter: 1
Question
1. Second Bank has the following balance sheet in millions of dollars with the Basel risk weights given in parentheses:
US Govt T-Bonds (0%) $100m | Deposits $860M
Govt Agency FNMA Bonds (20%) $200M | Subordinated Debt ((Tier II)) $10M
Mortgages (50%) $200M | Preferred Stock (Tier II) $10M
Consumber Loans AAA+ (20%) $200M
Commercial Loans BBB (100%) $300M | Equity (Tier 1) $20M
Total: $1000M | Total: $1000M
Does the bank have enough capital to meet the requirements as specified by Basel 3 (6% of Tier 1 and 8% of Tier 1+2)? Explain.
2. Continuing with question 1, assume the bank wishes to keep its Tier 1 ratio exactly at 6%. They will sell a portion of thier BBB consumer loans and invest them in US government bonds, or the other way around, substituting government bonds with BBB loans. How much consumer loans should they issue or sell? Explain
Explanation / Answer
As per basel 3 the ratio rule are :
As per given data ,RWA : Govt Agency FNMA Bonds (20%) $200M;Mortgages (50%) $200M;Consumber Loans AAA+ (20%) $200M and Commercial Loans BBB (100%) $300M
RWA = 0.20* 200 +0.5*200+0.20*200+ 1*300 = 480 million
Tier I capital = 20 million
Ratio = 20/480 = 4.17 % ------------Not meet the requirement
Tier I + II capital = 40 million
Ratio = 40 /480 = 8.333%---------------higher than the requirement of 8%
Answer 2) to maintain the Tier I capital ratio to 6% with Tier I capital value of 20 million .
RWA value should be = 20/6% = 333.333 million.
The current RWA level = 480 million
sell a portion of thier BBB consumer = 480 -333.333= 146.67 million and put in Goverment bond
The consumer loan will not sufice the need as the loan has only 0.20*200 = 40 million share in total RWA, very less than the required reducing amount of 146.67 millions.
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