A FI has the following balance sheet with values in millions of dollars. All ass

Question

A FI has the following balance sheet with values in millions of dollars. All assets are associated with corporate customers

In addition the FI has off-balance sheet items as follows: $50 million in commercial letters of credit (LCs),

$300 million in 3-yr interest rate swaps that are in the money by $2 million

$50 million in 4-yr forward FX contracts that are out the money by $2 million

A. Is the FI over or under captalized on the balance sheet assets in order to be considered well capitalized according to BASEl III?

B. what are the total risk adjusted off balance sheet assets of the bank as defined under Basel II standards?

c. what is the minimum Tier 1 and Total risk-based capital the FI needs in order to be considered adequately capitalized under Basel III capital requirements fo both on and off balance sheet items?

cash $80 Deposits $550 municipal general obligation bonds 100 residental mortgages 1-4 family (LTV 60% -80%) 220 Long-term Debt 290 Commercial loans 500 Equity 60 Total assets 900 Total 900

Explanation / Answer

Answer:B

Answer:c No, the bank does not have sufficient capital to meet the Basel II requirements. In fact, it needs Tier 1 = 150 x 0.04 = $6.00m and a similar amount for Tier 2.

Standby LCs $50 m*0.20 10 10 Foreign exchange contracts: Potential exposure 50*0.05 2.5 Current exposure Out of the money 0 Interest rate swaps Potential exposure 300*0.005 1.5 Current exposure In the money 2 6 *1.00 6 Total risk adjusted off balance sheet assets 16

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