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Let’s assume that you have been asked to calculate risk-based capital ratios for

ID: 2612724 • Letter: L

Question

Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts.

Cash                                                    7 million

Government Securities:                       9 million

Mortgage loans                                    25 million

Other loans                                          55 million

Fixed assets                                         8 million

Intangile assets                                    5 million

Loan-loss reserves                              4 million

Owners’ equity                                    6 million

Trust-preferred securities                   3 million

Cash assets and government securities are not considered risky.

Loans secured by real estate have a 50% weighting factor.

All other loans have a 100 % weighting factor in term of riskiness.  

Calculate the equity capital ratio.

Calculate the Tier 1 Ratio using risk-adjusted assets.

Calculate the Total Capital (Tier 1 and Tier 2) Ratio using risk-based assets.

Explanation / Answer

(‘1)

Equity Capital Ratio

Equity Capital Ratio= Owners Equity / Assets.

Assets

Amount ( $ in millions)

Cash

7.00

Government Securities

9.00

Mortgage Loan

25.00

Other Loan

55.00

Fixed Assets

8.00

Intangible Assets

5.00

Total Assets

109.00

Equity Capital Ratio= 6/109

Equity Capital Ratio= 5.50 times

Tier 1 Ratio

Calculation of Risk based assets.

Exposure

Amount (Million)

Weight Risk

Risk Adjusted Base

Cash

7

0

0

Government Securities

9

0

0

Mortgage Loans

25

50 %

25

Other Loans

55

100 %

55

Total

80.00

Tier 1 Ratio= Tier 1 Capital/ Risk Adjusted Base

Tier 1 Capital

= Owners Equity + Trust Preferred Securities-Intangible Assets

Tier 1 Capital= 6+3-5

Tier 1 capital = 4

Tier 1 Ratio= 4/80

Tier 1 ratio= 5.00 %

Total Capital Ratio = (Tier 1 capital + tier 2 capital)/ Risk adjusted assets

Total Capital = Tier 1 capital + Loan-loss reserve

Total Capital= 4+4= 8

Total Capital Ratio= 8/80

Total Capital Ratio= 10.00%

Assets

Amount ( $ in millions)

Cash

7.00

Government Securities

9.00

Mortgage Loan

25.00

Other Loan

55.00

Fixed Assets

8.00

Intangible Assets

5.00

Total Assets

109.00