Question

Suppose that Oldhat Financial starts its first day of operations with $9 million in capital. A total of $130 million in checkable deposits is received. The bank makes a $25 million commercial loan and another $50 million in mortgages with the following terms: 200 standard, 30-year, fixed-rate mortgages with a nominal annual rate of 5.25%, each for $250,000. Assume that required reserves are 8%.

A. What does the bank balance sheet look like?

B. How well capitalized is the bank?

C. Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat’s first day.

Answer 1

Ans:

A.

Assets		Liabilities
Particulars	Amount ($)	Particulars	Amount ($)
Required reserves (130*8%)	10.4 million	Checkable deposit	130 million
Excess reserves (130+9-75-10.4)	53.6 million	Bank balance	9 million
Loans (25+50)	75 million
	139 million		139 million

B. Bank is well capitalized =   9/ 139

= 6.47 %

C.

Reserves have a zero weight . So $ 64 million has zero weight.

Residential mortgages carry a 50% weight , RW assets = $ 25 million

Commercial loans carry a 100% weight, RW assets = $25 million

The capital ratio = 9/50 (25+25)

= 18%