Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million
ID: 2632187 • Letter: O
Question
Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I capital is $500,000 and Tier II capital is $400,000. How will each of the following transactions affect the value of the Tier I and total capital ratios? What will the new value of each ratio be? The current value of the Tier I ratio is 5 percent and the total ratio is 9 percent.
a. The bank repurchases $100,000 of common stock with cash. [5 Marks]
b. The bank issues $2 million of CDs and uses the proceeds to issue mortgage loans. [5 Marks]
c. The bank receives $500,000 in deposits and invests them in T-bills. [5 Marks]
d. The bank issues $800,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating. [5 Marks]
e. The bank issues $1 million in non-qualifying perpetual preferred stock and purchases general obligation municipal bonds. [5 Marks]
f. Homeowners pay back $4 million of mortgages and the bank uses the proceeds to build new ATMs.
Explanation / Answer
a) In this case as the bank is repurchasing $100,000 worth of common stock, it result in decline of tier I stock by same worth. hence the tier I stock after repurchase would be $400,000 and also total capital decreases to $800,000. Hence the tier I capital ratio declines from 5% to 4% , reflecting the total capital ratio decline from 9% to 8%. Here as the cash is having a 0 risk weight so it would not reflect risk-weighted assets.
b) Here as the risk weight for mortgages is of 50%. This would reflect with an increase in risk weighted assets from $10,000,000 to $12,000,000 ($10,000,000+$2,000,000(0.5)). This also reflects the tier I capital ratio with a decline to 4.54% ($500,000/$11,000,000) and decline in the total capital ratio to 8.18% ($9,000,000/$11,000,000).
c) As the T-Bills would have a 0 risk weightage, so the risk weighted assets also remain unchanged. Therefore in this case both the capital ratios remain unchanged.
d) With the issue of common stock the tier l capital, it increases to $1.3 million and also the total capital increases to $1.7 million. As the developer has A- credit rating the risk weightage of loan would be 50%.Thus, risk weighted assets increase to $10.4million ($10 million+800,000(0.5)). The tier I capital ratio will be increasing by 12.50% ($1.3M/$10.4M). Thus the total capital ratio increases to 16.35%.
e)As the general obligation of municipal bonds fall in the category of 20% risk weight. So the tier I capital remains unchanged and risk weighted capital increase to $10.2 million ($10 million+$1 million (0.2)).Thus the total capital increases by $1.9 million, resulting to a decline of tier I ratio to 4.90%($500,000/$10.2million) also the total capital ratio declines to 18.63%.
f)As the mortgage loans fall under category of 50% risk weightage and the ATMs fall under the category of 100% risk category. The risk weighted assets would raise to $12 million ($10M-$4M(0.5)+$1M(1.0)). Thus the tier I capital ratio decline by 4.17% ($500,000/$12 million) also the total capital ratio declines by 7.50%.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.