Framingland Bank starts its first day of operations with $11 million in capital.

Question

Framingland Bank starts its first day of operations with $11 million in capital. A total of $160 million in checkable deposits is received. The bank makes a $30 million commercial loan and another $60 million in mortgages with the following terms: 200 standard, 30-year, fixed-rate mortgages with a nominal annual rate of 5.25%, each for $300,000. Assume that the reserve requirement is 9%. .

How well capitalized is this bank? Explain why and show your calculations to support your answer.

Calculate the risk-weighted assets and risk-weighted capital ratio after Framingland’s first day.

Explanation / Answer

The Balnce sheet would be like below:

Assets Liabilities

Required and excess reserves $81 million Checkable Deposits $160 million

Loans $90 million Bank Capital $11 million

How well capitalized is this bank?

Capitalization = Capital / (Capital + Deposits)

Capitalization =$11 million / $171 million = 0.0643 i.e 6.43%

Bank is well capitalized.

Capital = $11 million

Deposits + Capital = $171 million

Calculate the risk-weighted assets and risk-weighted capital ratio after Framingland’s first day.:

Reserves have a zero weight. So, $81 million has zero weight.

Residential mortgages carry a 50% weight, which implies $30 million($60 million*50%) in risk-weighted assets.

Commercial loans carry a 100% weight, which implies another $30 million in risk-weighted assets

thus total risk-weighted assets are $60 million.

The bank’s risk-weighted capital ratio = Capital/Total risk weighted assets = 11/ 60 = 0.1833 i.e 18.33%

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