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-

Question

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?

Accepted Answer

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

[latex]\frac{ ext { Tier } 1 ext { Capital }}{ ext { Total Risk-Weighted Assets }}=\frac{\$ 70 ext { million }}{\$ 860.9 ext { million }}=\quad 0.0813 ext { or } 8.13 ext { percent }[/latex]

[latex]\frac{ ext { Total Capital }}{ ext { Total Risk-Weighted Assets }}=\frac{\$ 70+\$ 45 ext { million }}{\$ 860.9 ext { million }}=0.1336 ext { or } 13.36 ext { percent }[/latex]

Leverage ratio:

[latex]\frac{ ext { Tier } 1 ext { Capital }}{ ext { Total average Assets }}=\frac{\$ 70 ext { million }}{\$ 860.9-\$ 17.4-}=[/latex]=$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).

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

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