3. First National Bank (BBB rated) has the following balance sheet (in millions of dollars) with the counterparty credit ratings and risk weights in parentheses. Answer (i) to (iv)

Assets		Liabilities and equity
Cash	$15	Deposits	$214
Government bonds (rated AA, 0% risk weight)	25	Subordinated debt (>10 years)	2
Interbank deposits, 2-month (rated AA+, 20% risk-weight)	30	Non-Cumulative irredeemable preference shares	5
Corporate loans (rated A-, 50% risk weight)	75	Ordinary shares	3
Fixed assets (100% risk weight)	80	Retained earnings	1
Total assets	225	Total liabilities and equity	$225

 

In addition, the bank engages in the following off-balance activities:

• $40 million in documentary letters of credit to CCC rated corporations (DLoCs) (150% risk weight)
• $150 million in 6-month forward FX contracts that are currently out of the money by $2 million
• $200 million in six-year interest rate swaps that are currently in the money by $2 million
• $100 million in exchange-traded currency options that are currently in the money by $0.5 million.
• All derivatives are written on BBB rated counterparties (100% risk-weight).

 

Credit conversion factors follow:
Performance-related SLoC	50%
Trade-related dLoC	20%
≤ 1 year loan commitment	20%
> 1 year loan commitment	50%
≤ 1 year foreign exchange contracts	1%
1–5 year foreign exchange contracts	5%
1–5 year interest rate swaps	0.5%
5–10 year interest rate swaps	1.5%
1-5 year equity contracts	8%

 

1. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel III Accord?                                                                                           
2. What are the risk-adjusted off-balance-sheet assets of the bank as defined under the Basel Accord and the total credit risk-adjusted assets?                                     

   

Answer rating: 100% (QA)

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