Onshore Bank has $20 million in assets, with risk-adjusted assets of S10 million
ID: 2649131 • Letter: O
Question
Onshore Bank has $20 million in assets, with risk-adjusted assets of S10 million. Core Equity Tier 1 (CET1) capital is S500,000, additional Tier I capital is $50,000, and Tier II capital is S400,000. The current value of the CET1 ratio is 5 percent, the Tier I ratio is 5.5 percent, and the total capital ratio is 9.5 percent. Calculate the new value of CET Tier I, and total capital ratios for the following transactions. a. The bank repurchases $100,000 of common stock with cash. (Round your answers to 1 decimal place. (e.g. 32.1 CET1 ratio Tier ratio Total capital ratio b. The bank issues $2 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 80 percent. (Round your answers to 2 decimal places. (e.g., 32.16) CET1 ratio Tier ratio Total capital ratio c. The bank receives $500,000 in deposits and invests them in T-bills. (Round your answers to 1 decimal place. (e.g., 32.1) CET1 ratio Tier ratio Total capital ratio d. The bank issues $800,000 in common stock and lends it to help finance a new shopping mall. The developer has an At credit rating. (Round your answers to 2 decimal places. (e.g., 32.16) CET1 ratio Tier ratio Total capital ratio e. The bank issues $1 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds. (Round your answers to 2 decimal places. (e.g., 32.16 CET1 ratio Tier ratio Total capital ratio f. Homeowners pay back $4 million of mortgages with loan-to-value ratios of 40 percent and the bank uses the proceeds to build new ATMs. (Round your answers to 2 decimal places. (e.g., 32.16) CET1 ratio Tier ratio Total capital ratioExplanation / Answer
Lets start with noting down the formula:
CET 1 Ratio = Core Equity Tier 1 CET1 / Risk Adjusted Assets
Tier 1 Ratio = (Core Equity Tier 1 + Additional Tier 1 Capital ) / Risk Adjusted Assets
Total Capital Ratio = Total Capital (CET1 + T1 + TII Capital) / Risk adjusted Assets
Case 1:
Cash has zero % weight so risk adjusted asset do not changes
Case 2
Mortgage has 50% weight. There fore the risk weighted assets increases to $10,000,000 + 80% x (20,000,000 x .5)
= $10,000,000 + 800,000. Rest all remains unchanged
Case 3:
T Bills have zero risk weight so everything remains unchanged. So all the ratios will remain same
Case 4:
When $800,000 commons stock is issued it increases the CET1 and increases the total capital. It also increases the risk adusted capital to 10,400,000 as loan has 50% weight 10,000,000 + ($800,000 * .5).
Case 5:
CET 1 and T1 remains unchanged . TII increases by 1 million making the value to 1,400,000. and total capital increases to 1,950,000. General Municiple bond have risk weight tof 20%. Making the risk adjusted value to increase by 1,000,000 x .2 = 200,000. Total risk adjusted casset would be 10,000,000 + 200,000 = 10,200,000.
Case 6:
Mortgage loan have 50% weight and ATMs have 100% weights. Therefore the risk adjusted asset increases to 10,000,000 - 4,000,000 x (.5) + 4,000,000 x (1) = $12,000,000. Rest all remains unchanged.
Hope this helps.
Particulars Current Value Bank purchases Common stock New Values Total Assets 20,000,000 20,000,000 Risk Adjusted Assets 10,000,000 10,000,000 Core Equity Tier 1 CET1 500,000 -100,000 400,000 Additional Tier 1 Capital 50,000 50,000 Tier II capital 400,000 400,000 Total Capital 950,000 -100,000 850,000 CET 1 Ratio = Core Equity Tier 1 CET1 / Risk Adjusted Assets 5 4 Tier 1 Ratio = (Core Equity Tier 1 + Additional Tier 1 Capital ) / Risk Adjusted Assets 5.5 4.5 Total Capital Ratio = Total Capital (CET1 + T1 + TII Capital) / Risk adjusted Assets 9.5 8.5Related Questions
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