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Question 15.P.4: Using the following information for Bright Star National Ban...

Using the following information for Bright Star National Bank, calculate that bank’s ratios of Tier 1-capital-to-risk-weighted assets and total-capital-to-risk-weighted assets under the terms of the Basel I Agreement. Does the bank have sufficient capital?

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On-Balance-Sheet Items (Assets) Off-Balance-Sheet Items
Cash $ 4.5 million Standby letters of credit backing repayment of commercial paper $ 17.5 million
U.S Treasury securities 25.6 Long term unused loan commitments to corporate customers 30.5
Deposit balances due from other banks 4 Total off-balance-sheet items $ 48 million
Loans secured by first lines on residential property (1- to-4- family dwellings) 50.8 Tier 1 capital $7.5 million
Loans to corporations 105.3 Tier 2 capital $5.8 million
Total assets $190.2 million

 

Bright Star National Bank’s required level of capital under the new international capital standards would be determined from:

 

Standby credit letter: $17.5 million * 1.00 = $17.5 million

 

Long-term credit commitments: $30.5 million * 0.50 = 15.25 million

 

0% Risk-Weighting Category:
Cash $ 4.5 million
U.S. Treasury securities 25.6 million
$ 30.1 * 0 = $0 million

 

20% Risk Weighting Category:
Balances due from other Banks $ 4.0 million
Credit equivalent Amounts of
Standby credits 17.5 million
$ 21.5 million * 0.20 = $4.3 million

 

50% Risk Weighting Category:
Residential real estate loans $ 50.8 million x 0.50 = $25.4 million

 

100% Risk Weighting Category:
Loans to corporations $105.3 million
Credit equivalents of
long-term commitments $15.25 million
$120.55 million * 1.0 = $120.55 million
Total Risk-Weighted Assets $150.25 million

 

The bank’s capital ratio is:

 

Tier 1 capital/Risk-Weighted Assets =$ 7.5 million/$ 150.25 million = 4.99%

 

Total capital/Risk-Weighted Assets =  $ 13.3 million/$ 150.25 million = 8.85%

 

It is just above the minimum Tier 1 capital requirement of 4 percent and total capital (Tier One + Tier Two) requirement of 8 percent.

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