SampleQuestiononCapitalRequirements: ThirdBankhasthefollowingbalancesheet(inmillions),withtheriskweightsinparentheses. AssetsLiabilitiesandEquityCash(0%)$20Deposits$175OECDinterbankdeposits(20%)25Subordinateddebt(5years)3Mortgageloans(50%)70Cumulativepreferredstock5Consumerloans(100%)70Equity2TotalAssets$185Totalliabilitiesandequity$185 The cumulative preferred stock is qualifying and perpetual. In addition, the bank has $30millioninperformance-relatedstandbylettersofcredit(SLCs)toaBB+ratedcorporation, $40 million in two-year forward FX contracts that are currently in the money by $1 million,and $300 million in six-year interest rate swaps that are currently out of the money by $2million.Credit conversion factors follow: Performance-relatedstandbyLCs50%1-to5-yearforeignexchangecontracts5%1-to5-yearinterestrateswaps0.5%5-to10-yearinterestrateswaps1.5% What are the risk-adjusted on-balance-sheet assets of the bank as defined under theBaselAccord? Risk-adjustedassets: Cash0 x 20=$0OECDinterbankdeposits0.20 x 25=$5Mortgageloans0.50 x 70=$35Consumerloans1.00 x 70=$70Totalrisk-adjustedassets=$110= $110 Whatisthetotalcapitalrequiredforbothoff-andon-balance-sheetassets? StandbyLCs:$30 x 0.50 x 1.0=$15= $15Foreignexchangecontracts:Potentialexposure$40 x 0.05=$2 Current exposureInterestrateswaps:inthemoney=$0Potentialexposure$300 x 0.015=$4.5CurrentexposureOut-of-themoney=$2= Totalrisk-adjustedon-andoff-balance-sheetassetsTotalcapitalrequired$8.5 x1.0=$8.5 = $133.50 x 0.08 = $10.68 DoesthebankhaveenoughcapitaltomeettheBaselrequirements?Ifnot,whatminimumTier1 ortotalcapital doesit needtomeet therequirement? No, the bank does not have sufficient total capital to meet the Basel requirements. It needstotalcapitalof $10.68million, ofwhichTier 1must beat least$133.50million x0.04 = $5.34million.Further,sinceperpetualpreferredstockislimitedto25percent($1.335million) of Tier 1, the bank needs at least $4.005 million of equity capital. Thus, anadditional$2.005millionofequityisnecessary tosatisfytheTier1requirements. If Tier I actually equals $5.34 million, the required Tier II capital also will be $5.34million. Of this amount, the remaining perpetual preferred stock of $3.665 million iscounted, which leaves $1.675 million of subordinated debt that can be used to satisfy theTier II requirement. This amount is available and satisfies the limit of 50% of Tier I rule.(Referto Table20-5 forexplanations of TierI andTier IIrequirements.)
