Onshore Bank has $32 million in assets, with risk-adjusted assets of $22 million
ID: 2758344 • Letter: O
Question
Onshore Bank has $32 million in assets, with risk-adjusted assets of $22 million. Core Equity Tier 1 (CET1) capital is $1,000,000, additional Tier I capital is $340,000, and Tier II capital is $424,000. The current value of the CET1 ratio is 4.55 percent, the Tier I ratio is 6.09 percent, and the total capital ratio is 8.02 percent.
Calculate the new value of CET1, Tier I, and total capital ratios for the following transactions.
The bank repurchases $112,000 of common stock with cash. (Round your answers to 2 decimal places. (e.g., 32.16))
The bank issues $3.2 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 80 percent. (Round your answers to 2 decimal places. (e.g., 32.16))
The bank receives $512,000 in deposits and invests them in T-bills. (Round your answers to 2 decimal places. (e.g., 32.16))
The bank issues $812,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating. (Round your answers to 2 decimal places. (e.g., 32.16))
The bank issues $2.2 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds. (Round your answers to 2 decimal places. (e.g., 32.16))
Homeowners pay back $5.2 million of mortgages with loan-to-value ratios of 40 percent and the bank uses the proceeds to build new ATMs. (Round your answers to 2 decimal places. (e.g., 32.16))
a.The bank repurchases $112,000 of common stock with cash. (Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Solution:
a) The bank repurchases $112,000 of common stock with cash:
CET1 ratio = (1,000,000 - 112,000)/ 22,000,000 = 4.04%
Tier I = (888,000 + 340,000)/ 22,000,000 = 5.58%
Total capital ratio = (888,000 + 340,000 + 424,000)/ 22,000,000 = 7.51%
b) The bank issues $3.2 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 80 percent:
The risk weight for mortgages is 80 percent. Thus, risk-weighted assets increase to 22,000,000 + 3,200,000 (.8) = 24,560,000
CET1 ratio = 1,000,000/ 24,560,000 = 4.07%
Tier I = (1,000,000 + 340,000)/ 24,560,000 = 5.46%
Total capital ratio = (1,000,000 + 340,000 + 424,000)/ 24,560,000 = 7.18%
c) The bank receives $512,000 in deposits and invests them in T-bills:
T-bills have a 0 risk weight so risk-weighted assets remain unchanged. Thus, all three ratios remain unchanged.
d) The bank issues $812,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating:
The business loan’s risk weight is 80 percent. Thus, risk-weighted assets increase to 22,000,000 + 812,000 (0.8) = 22,649,600
CET1 ratio = 1,812,000/ 22,649,600 = 8.00%
Tier I = (1,812,000 + 340,000)/ 22,649,600 = 9.50%
Total capital ratio = (1,812,000 + 340,000 + 424,000)/ 22,649,600 = 11.37%
e) The bank issues $2.2 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds:
CET1 and Tier I capital are unchanged. Total capital increases to 2,624,000. General obligation municipal bonds fall into the 20 percent risk category. So, risk-weighted assets increase to 22,440,000
CET1 ratio = 1,000,000/ 22,440,000 = 4.46%
Tier I = (1,000,000 + 340,000)/ 22,440,000 = 5.97%
Total capital ratio = (1,000,000 + 340,000 + 2,624,000)/ 22,440,000 = 17.66%
f) Homeowners pay back $5.2 million of mortgages with loan-to-value ratios of 40 percent and the bank uses the proceeds to build new ATMs:
The mortgage loans have a risk weight of 40 percent. The ATMs are 100 percent risk weighted. Thus, risk-weighted assets increase to 22,000,000 - 5,200,000 (0.4) + 5,200,000 (1.0) = 25,120,000
CET1 ratio = 1,000,000/ 25,120,000 = 3.98%
Tier I = (1,000,000 + 340,000)/ 25,120,000 = 5.33%
Total capital ratio = (1,000,000 + 340,000 + 424,000)/ 25,120,000 = 7.02%
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