Question

The following is an extract from the asset side of the balance sheet of the commercial bank

M uid Asset Kwacha Treasury Bills 100.000 Interbank Loans 500,000 Mortgages 400,000 Consumer Loans 200,000 Corporate Loans 200,000 1,400,000 Total richted ass

a) what is the total of the banks risk weighted
assets
b) the bank has K35 000 in tier 1 capital
. does the bank meet it's primary regulatory capital requirements
c) The banks Tier 2 capital amounts to K20, 000.
what is the total capital adequacy position of the bank

Answer 1

I have assumed Basel III norms for comparison.

Part (a)

Please see the table below. Please be guided by the second row to understand the mathematics. The cell highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in Kwacha.

Assets	Amount ($)	%	Risk- Weighted assets
	A	B	C = A x B
Treasury bills	100,000	0%	-
Inter bank loans	500,000	20%	100,000
Mortgages	400,000	50%	200,000
Consumer loans	200,000	100%	200,000
Corporate loans	200,000	100%	200,000
Total risky assets	1,400,000		700,000

Part (b)

Requirement: As per Basel III, Primary or tier 1 capital must be a minimum of 8% of the bank's or financial institution's total risk-weighted assets.

Actual : Tier 1 Capital as % of risk weighted assets = 35,000 / 700,000 = 5%

Hence, the bank does not meet its primary regulatory capital requirements, as per Bassel III.

Part (c)

Capital adequacy ratio = (Tier 1 Capital + Tier 2 capital) / Risk weighted assets = (35,000 + 20,000) / 700,000 = 7.86% < 10.5% = minimum stipulated under Basel III. The capital adequacy ratio is inadequate.