Capital Adequacy Problems (chapter 20)

1.      Third Bank has the following balance sheet (in millions) and has no off-balance-sheet
activities.
         Assets                                                     Liabilities and Equity
         Cash                                           $20      Deposits                                            $940
         Treasury bills                                90      Subordinated debentures                      25
         Claims on government sponsored
               Enterprises (GSEs)                 40      Common stock                                      45
         Residential mortgages                            Retained earnings                                 40
           (category 1; loan-to-value                   
             ratio = 55%)                           500     
         Commercial loans                       400           
         Total assets                            $1,050      Total liabilities and equity              $1,050
 
 
         a.   1. What is the quantity of risk-adjusted on-balance-sheet assets of the bank as defined
under the Basel I Accord? (20*0%)+(90*0%)+(40*20%)+(500*50%)+(400*100%)=
$658,000,000

               2. What is the quantity of risk-adjusted on-balance-sheet assets of the bank as defined
under the Basel III Accord? (20*0%)+(90*0%)+(40*20%)+(500*35%)+(400*100%)=
$583,000,000
 
         b.   1.      What is the actual ratio of common equity Tier 1 Capital to total assets?
(45+40)/1050= 8.10%
               2.      What is the actual ratio of Tier 1 Capital to risk-adjusted assets using the Basel I
definition of risk-adjusted assets? (45+40)/658= 12.92%
               3.      What is the actual ratio of Tier 1 Capital to risk-adjusted assets using the Basel III
definition of risk-adjusted assets? (45+40)/583= 14.58%
 
            c. What is the total capital required for the on-balance sheet assets of the bank under
Basel I for the bank to be adequately capitalized? The total capital should be greater than
$52.64M (658*0.8) and less than $65.8M (658*0.1), between 8% and 10%.

 
            d. What is the Common equity capital (include the minimum common equity capital ratio
plus the capital conservation buffer) required for the Bank under the Basel III accord in Jan,
2019? Minimum common equity capital ratio + capital conservation buffer = common equity
capital. 4.5%+2.5%=7%. Common equity capital must be at least $40.81 million (7%*583)