QUESTION 17: SOLVENCY AND CAPITAL REGULATION Third Bank has the following balance sheet (in millions of...
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QUESTION 17: SOLVENCY AND CAPITAL REGULATION "Third Bank" has the following balance sheet (in millions of dollars) with the risk weights in parentheses. Cash (0%) Interbank deposits with AA rated banks (20%) Standard residential mortgages non- insured with LVR of 85% (50%) Business loans to BB rated borrowers (100%) Total assets Assets $20 Deposits 25 Subordinated debt (5 years) (Tier 2 capital) 70 Cumulative preference shares (Tier 1) 70 Common equity (Tier 1) $185 Total liabilities and equity In addition, the bank has $30 million in performance-related standby letters of credit (SLCs), $40 million in two-year forward FX contracts that are currently in the money by $1 million, and $300 million in six-year interest rate swaps that are currently out of the money by $2 million. Cash Interbank deposits Mortgage loans Business loans Total risk-adjusted assets (a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord? Basel III ratios Capital ratios, per cent Minimum Conservation buffer Minimum plus conservation buffer Common All Tier 1 Total equity capital capital 6.0% 8.0% Liabilities and equity 4.5% Calculation (b) Discuss briefly under which circumstances the two-year forward FX contracts and the interest rate swaps introduce an additional risk for the bank. 2.5% (c) Presume that the off-balance sheet risk is evaluated at $19.25 million. What is the total amount of risk-adjusted on- and off-balance-sheet assets? 7.0% 8.5% 10.59 $175 3 Risk Weighted value (d) Calculate the actual capital ratios of Third Bank and identify if it is sufficient to meet the regulatory capital requirements? If not, which type of capital does it need to raise in order to meet the requirement? Countercyclical buffer 0-2.5% *Common aquity or other fully loss-absorbing capital 5 2 $185 QUESTION 17: SOLVENCY AND CAPITAL REGULATION "Third Bank" has the following balance sheet (in millions of dollars) with the risk weights in parentheses. Cash (0%) Interbank deposits with AA rated banks (20%) Standard residential mortgages non- insured with LVR of 85% (50%) Business loans to BB rated borrowers (100%) Total assets Assets $20 Deposits 25 Subordinated debt (5 years) (Tier 2 capital) 70 Cumulative preference shares (Tier 1) 70 Common equity (Tier 1) $185 Total liabilities and equity In addition, the bank has $30 million in performance-related standby letters of credit (SLCs), $40 million in two-year forward FX contracts that are currently in the money by $1 million, and $300 million in six-year interest rate swaps that are currently out of the money by $2 million. Cash Interbank deposits Mortgage loans Business loans Total risk-adjusted assets (a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord? Basel III ratios Capital ratios, per cent Minimum Conservation buffer Minimum plus conservation buffer Common All Tier 1 Total equity capital capital 6.0% 8.0% Liabilities and equity 4.5% Calculation (b) Discuss briefly under which circumstances the two-year forward FX contracts and the interest rate swaps introduce an additional risk for the bank. 2.5% (c) Presume that the off-balance sheet risk is evaluated at $19.25 million. What is the total amount of risk-adjusted on- and off-balance-sheet assets? 7.0% 8.5% 10.59 $175 3 Risk Weighted value (d) Calculate the actual capital ratios of Third Bank and identify if it is sufficient to meet the regulatory capital requirements? If not, which type of capital does it need to raise in order to meet the requirement? Countercyclical buffer 0-2.5% *Common aquity or other fully loss-absorbing capital 5 2 $185
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Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
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