A bank reports the following items on its latest balance sheet: allowance for loan and lease losses, $42 million; undivided profits, $81 million; subordinated debt capital, $3 million; common stock and surplus, $27 million; equity notes, $2 million; minority interest in subsidiaries, $4 million;

Question

A bank reports the following items on its latest balance sheet: allowance for loan and lease losses, $42 million; undivided profits, $81 million; subordinated debt capital, $3 million; common stock and surplus, $27 million; equity notes, $2 million; minority interest in subsidiaries, $4 million; mandatory convertible debt, $5 million; identifiable intangible assets, $3 million; and noncumulative perpetual preferred stock, $5 million. How much does the bank hold in Tier 1 capital? In Tier 2 capital? Does the bank have too much Tier 2 capital?

Accepted Answer

The Tier 1 capital items include:		The Tier 2 capital items include:
Common stock and surplus	$27 mill.	Allowance for loan and	$42 mill.
		lease losses
Undivided profits	81	Subordinated debt capital	3
Noncumulative perpetual		Mandatory convertible debt	5
preferred stock	5	Equity notes	2
Identifiable intangible assets	3
Minority interest in
subsidiaries	4

Total Tier 1 capital	$120 mill.	Total Tier 2 capital	$52 mill.

The bank does not have too much Tier 2 capital. Tier 2 capital can be up to 100 percent of the amount of Tier 1 capital and still count toward meeting capital requirements.

Question 15.12: A bank reports the following items on its latest balance she...

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