Reference no: EM132678438
Third Bank has the following balance sheet (in millions), with the risk weights in parentheses.
Assets Liabilities and Equity
Cash (0%) K70 Deposits K175
OECD Interbank deposits (20%) K25 Subordinated debt (2.5 years) K3
Mortgage loans (50%) K70 Cumulative preferred stock K5
Consumer loans (100%) K20 Equity K2
Total Assets K185 Total Liabilities & Equity K185
The cumulative preferred stock is qualified and perpetual. In addition, the bank has K30 million in performance-related standby letters of credit (SLCs), 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 LCs 50%
1-5 year foreign exchange contracts 5%
1-5 year interest rate swaps 0.5%
5-10 year interest rate swaps 1.5%
REQUIRED:
Problem A. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord III?
Problem B. What is the total capital required for both off- and on-balance-sheet assets?
Problem C. Does the bank have enough capital to meet the Basel requirements? If not, what minimum Tier 1 or total capital does it need to meet the requirement?
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