Question

Sigma Bank has the following balance sheet in millions of dollars.

assets		liabilities
current assets		current liabilities
cash	21	repo agreements	265
petty cash	0.0001	commercial paper	35.9
marketable securities	8	wages payable	8.5
Long term corp bonds	40.5	interest payable	2.9
residential mortgages	31	taxes payable	4.1
commercial mortgages	3.8	federal funds loans	1.1
prepaid insurance	1.5	unearned revenues	1.5
total current assets	106	accrued income	2.0
		total current liabilities	321
investments
Sovereign bonds	10	long term liabilities
Loans to foreign banks	11	senior comm, note payable	110
Other investments	9	senior notes payable	236
total investments	30	subordinate notes payable	19
		perpetual debt	20
		convertible notes	5
		total long term liabilities	390
Property, plant & equipment
land	5.5	stockholders equity
land improvements	6.5	common stock	70
buildings	169	retained earnings	19
equipment	201	minority interest in subsidiaries	5
less accum. depreciation	-56	non- cumulative perpetual pref. stock (qualified)	9
prop plant & eqip -net	326	perpetual trust preferred	6
		less: treasury stock	-50
intangible assets		total stockholders equity	59
goodwill	21
trade names	284
total intangible assets	305
other assets	3
total	770	total liabilities and equity	770

Balance Sheet Notes:

Note on hybrid securities

Basel III provides guidelines for the type and amount of hybrid securities to be used in Teir I capital. For the purposes of this assignment, you can assume that Intermediate preferred stock is included but any convertible debt is not.

Note on Treasury stock

• In the calculation of CET1 Capital, common stock is net of treasury stock.

Note on accumulated depreciation

• In the calculation of risk-adjusted assets, the value of fixed assets such as buildings, land, equipment, etc. is taken net of accumulated depreciation.

Note on Marketable Securities

• Marketable securities can be treated like cash

Notes on assets held:

• $10M of residential mortgages are category 2 with LTV greater than 90%

• The rest of residential mortgages are category 1 with LTV between 60% and 80%

Note on Prepaid insurance

• Pre-paid insurance can be treated like cash Note on Sovereign Debt

• 50% of sovereign debt has a CRC rating or 2 the rest has a CRC rating of 3 Note on foreign bank debt

• Foreign bank loans are all made to banks in countries with CRC rating of 4

Off Balance Sheet Items

Off balance Sheet contingent guarantee contracts:

• $157 million in unused loan commitment to a foreign bank domiciled in a country with no CRC rating. The commitment was originally singed 5 years ago and has 3 more year to maturity.

• $83 million performance standby letters of credit issued to a U.S. corporation Off-balance sheet derivatives

• $200 million 10-year interest rate swaps with a value of -50 mill to Sigma

• $100 million 2-year forward €/$ contracts with a value of 20 mill to Sigma

Question: a) calculate the leverage ratio

(please show all work)

Answer 1

Leverage Ratio as per Basel III = Capital measure / Exposure Measure

Capital measure = total shareholders' equity = 59 (Please see the balance sheet, this figure is available there)

Exposure measure = Total assets + Off balance sheet items = 770 (available in balance sheet) + (157 + 83 + 200 + 100) (these figures are there in the last paragraph of the question) = 1,310

Hence, leverage ratio = 59 / 1,310 = 0.0450 = 4.50%