A bank has a base lending rate of 5%, and charges a customer a 150 basis...

 

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A bank has a base lending rate of 5%, and charges a customer a 150 basis point risk premium, as well as a 1% origination fee. The bank requires the customer to maintain compensating balances of 10% of the loan amount. The Fed's reserve requirement is 8% and the loan amount is $500,000. a) What is the required gross ROA? b) What is the ROA if the risk premium increases from 150 to 200 basis points? c) What is the ROA if the compensating balance increases from 10% to 20%? d) What is the ROA if the compensating balance decreases from 10% to zero? Suppose that the 99th percentile extreme loss rate for this type of loan is 10% and the loss rate on this loan is estimated to be 80%. Assume that the rate to fund a loan is 4.5%. e) What is the capital at risk for this loan? f) What is the RAROC for this loan? g) What is the RAROC if the extreme loss rate drops from 10% to 5%? h) What is the RAROC if the loss rate of this loan increases from 80% to 90%? A bank has a base lending rate of 5%, and charges a customer a 150 basis point risk premium, as well as a 1% origination fee. The bank requires the customer to maintain compensating balances of 10% of the loan amount. The Fed's reserve requirement is 8% and the loan amount is $500,000. a) What is the required gross ROA? b) What is the ROA if the risk premium increases from 150 to 200 basis points? c) What is the ROA if the compensating balance increases from 10% to 20%? d) What is the ROA if the compensating balance decreases from 10% to zero? Suppose that the 99th percentile extreme loss rate for this type of loan is 10% and the loss rate on this loan is estimated to be 80%. Assume that the rate to fund a loan is 4.5%. e) What is the capital at risk for this loan? f) What is the RAROC for this loan? g) What is the RAROC if the extreme loss rate drops from 10% to 5%? h) What is the RAROC if the loss rate of this loan increases from 80% to 90%?

Answer rating: 100% (QA)

SOLUTION a Required gross ROA 5 150 bps 1 10 x 500000 54 b ROA if the risk premium increa... View the full answer