1. (4 points) Why are regulators concerned with the levels of capital held by a bank?

2. (4 points) Define/describe the various definitions of bank capital.

3. (4 points) In addition to the high risk of losses that may occur when a bank makes a second lien loan on a residential property, why might a bank be hesitant to make these types of loans (according to the information given in chapter 21)?

4. National Bank of Texas has the following balance sheet (in millions) and has no off-balance-sheet activities (ignore Business Indicator Capital Requirements p. 640). Parts a-g are worth 2 points each and part h is worth 4 points.

Assets Liabilities and Equity

Cash $40 Demand Deposits $360

Treasury bills and notes 140 MMDAs 400

Residential mortgages CDs 669

(category 1; loan-to-value Subordinated Debt 25

ratio = 70%) 300

Residential mortgages 150 Non-Cumulative perpetual 15

(category 2; loan-to-value preferred stock

ratio 90+%) Common Stock 12

Consumer loans 80 Retained Earnings 81

Business loans 830

Premises 30

Reserve for loan losses (8)

Total assets $1,562 Total liabilities and equity $1,562

a. What is NBTs credit risk adjusted asset amount under BASIL III?

b. What is the CET1 risk-based ratio?

c. What is the Tier I risk-based capital ratio?

d. What is the total risk-based capital ratio?

e. What is the leverage ratio?

f. In what capital risk category would the bank be placed?

g. Based on the Capital Conservations Buffer requirement, what is the maximum Payout Ratio NBT is allowed?

h. Assume NBT has historically maintained a dividend payout ratio of 50%. If you were a stockholder and Director of NBT, what would you do as a result of your answers to parts a- g? Why?