Suppose a bank has $6,000 in total capital and $100,000 in total assets. Bank ha

Question

Suppose a bank has $6,000 in total capital and $100,000 in total assets.

Bank has the following On-Balanace sheet and Off-balance sheet.

On-Balanace sheet
1. Cash $5,000
2. Treasury security $20,000
3. laons secured by family residential properties $5,000
4. loans to provide corporations $65,000

Off-balance sheet
1. Standby parking corporate borrowers $10,000
2. long term credit commitments to private companies $20,000

Determine whether the bank meets international capita requirements under Basel I requirement.

Explanation / Answer

Basel I is a set international banking regulation set diwn by BCBS, which sets out the minimum capital requirements of Financial Institutions. The international banks are required to maintain a minimum amount of 8% of capital based on risk weighted asset.

Calculation showing minimum capital required-

Hence the capital maintained is $6,000 which is less than the minimum requirement of $6,600 the bank doesn't meet international capita requirement under Basel I.

Items Amount Risk RWA Cash 5,000 0% 0 Treasury security 20,000 0% 0 Loan secured by residential property 5,000 50% 2,500 Loan to corporate Corporation 65,000 100% 65,000 off balance sheet item Standby parking corporate borrowers 10,000 50% 5,000 Long term credit committed to private companies 20,000 50% 10,000 82,500 Capital requirement is 8% of risk weighted assets 6,600

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