1. How does the leverage ratio test impact the stringency of regulatory monitoring of bank capital positions?

Third Bank has the following balance sheet (in millions), with the risk weights in parentheses.

Assets Liabilities and Equity Cash (0%) $ 20 Deposits $175 OECD interbank deposits (20%) 25 Subordinated debt (5 years) 3 Mortgage loans (50%) 70 Cumulative preferred stock 5 Consumer loans (100%) 70 Equity 2 Total assets $185 Total liabilities and equity $185 The cumulative preferred stock is qualifying and perpetual. In addition, the bank has $30 million in performance-related standby letters of credit (SLCs)

to a BB -rated corporation, $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. Credit conversion factors follow:

Performance-related standby LCs 50%

1- to 5-year foreign exchange contracts 5%

1- to 5-year interest rate swaps 0.5%

5- to 10-year interest rate swaps 1.5%