A Financial Institution (FI) is planning to offer $100 million in BB rated commercial loans (risk weight of 100%), and $200 million in mortgage loan (risk weight of 50%). The FI has $7 million of equity, 3 million of retained earnings. The FI will finance both commercial loans and mortgage loans by issuing demand deposits. The adequately total capital adequacy ratio is 8%, Reserve requirement is 10%.

Required:

a. Assume that the FI only funds those loans, what is the minimum capital required under Basle III in the adequately capitalized zone? Has the FI met this requirement and what will the FI do? (3 marks)

b. Assume that FI raise the funds by receiving demand deposits to offer the loans, what is the minimum amount of demand deposits needed to fund those loans? (3 marks)

c. Assume that the FI only funds those loans, show a simple balance sheet with total assets, total liabilities, and equity. (4 marks)

Answer rating: 100% (QA)

Capital Adequacy Ratio Analysis under Basel III a Minimum Capital Requirement Calculate RiskWeighted ... View the full answer