A commercial bank has provided the balance sheet below. It has no off-balance sheet activities. Commercial loans
Question:
A commercial bank has provided the balance sheet below. It has no off-balance sheet activities. Commercial loans have a 100% loan-to-value risk weight and construction loans have a 50% loan-to value risk weight.
Assets ($ millions) Liabilities and Equity ($ millions) Cash $ 32 Deposits $ 945 U.S.
Treasury securities 84
Subordinated debentures 62
Commercial loans 755
Common stock 34
Construction loans 184
Retained earnings 14
Total Assets $ 1,055
Total Liabilities and Equity $ 1,055
a. Calculate each of the following ratios. For each ratio, also explain which capital category zone the bank falls into. (6 points each)
i. CET1 risk-based capital ratio
ii. Tier I risk-based capital ratio
iii. Total risk-based capital ratio
iv. Tier I leverage ratio
b. Given your calculations and the capital categories in a., what prompt corrective actions will be required of the bank by its regulators? Explain. (5 points)
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders