Reference no: EM132503935
QUESTION ONE: Third Bank has the following balance sheet (in millions), with the risk weights in parentheses.
Assets
Cash (0%) 21
OECD interbank deposits (20%) 25
Mortgage loans (50%) 70
Consumer loans (100%) 70
Reserve for loan losses (1)
Total Assets K185
Liabilities and Equity
Deposits K176
Subordinated debt (5 years) 2
Cumulative preferred stock 2
Equity 5
Total liabilities and equity K185
The cumulative preferred stock is qualifying and perpetual. In addition, the bank has K30 million in performance-related standby letters of credit (SLCs) to a public corporation, K40 million in two-year forward FX contracts that are currently in the money by K1 million, and K300 million in six-year interest rate swaps that are currently out of the money by K2 million. Credit conversion factors follow:
Performance-related standby letters of credit 50%
1- to 5-year foreign exchange contracts 5%
1- to 5-year interest rate swaps 0.5%
5- to 10-year interest rate swaps 1.5%
A. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord?
B. To be adequately capitalized, what are the CET1, Tier I, and total capital required for both off- and on-balance-sheet assets?
C. Disregarding the capital conservation buffer, does the bank have enough capital to meet the Basel requirements? If not, what minimum CET1, additional Tier I, or total capital does it need to meet the requirement?
D. Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement? If not, what minimum CET1, additional Tier I, or total capital does it need to meet the requirement
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Risk weights in parentheses
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