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Question 15.P.6: Suppose that New River National Bank, whose balance sheet is...

Suppose that New River National Bank, whose balance sheet is given in problem 5, reports the forms of capital shown in the following table as of the date of its latest financial statement. What is the total dollar volume of Tier 1 capital? Tier 2 capital? Calculate the Tier 1 capital-to-risk-weighted-assets ratio, total capital-to-risk-weighted-asset ratio, and the leverage ratio. According to the data given in problems 5 and 6, does New River have a capital deficiency? What is its PCA capital adequacy category?

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Common stock (par value) $ 10 million
Surplus 15 million
Undivided profi ts 45 million
Allowance for loan losses 25 million
Subordinated debt capital 15 million
Intermediate-term preferred stock 5 million

 

New River National Bank has the following Tier 1 and Tier 2 Capital items and totals:

 

Tier 1 Capital Tier 2 Capital
Common stock (par) $10 million Allowance for loan loss $25 million
Surplus $15 million Subordinated debt capital $15 million
Undivided profit $45 million Intermediate term preferred stock $5 million
Total Tier 1 capital $70 million Total Tier 2 capital $45 million

 

\frac{\text { Tier } 1 \text { Capital }}{\text { Total Risk-Weighted Assets }}=\frac{\$ 70 \text { million }}{\$ 860.9 \text { million }}=\quad 0.0813 \text { or } 8.13 \text { percent }

 

\frac{\text { Total Capital }}{\text { Total Risk-Weighted Assets }}=\frac{\$ 70+\$ 45 \text { million }}{\$ 860.9 \text { million }}=0.1336 \text { or } 13.36 \text { percent }

 

Leverage ratio:

 

\frac{\text { Tier } 1 \text { Capital }}{\text { Total average Assets }}=\frac{\$ 70 \text { million }}{\$ 860.9-\$ 17.4-}==$70 million/$771 million 0.0908 or 9.08 percent

 

This bank has sufficient Tier 1 capital and since its Tier 2 capital amount is less than its Tier 1 capital amount it satisfies the requirements of Basel I. Also its PCA capital adequacy category is Well capitalized (it has a ratio of capital to risk-weighted assets of at least 10 percent, a ratio of Tier 1 (or core) capital to risk-weighted assets of at least 6 percent, and a leverage ratio (Tier 1 capital to average total assets) of at least 5 percent).

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