Question

Question C2 (a) Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. CET1 capital is $500,000, additional Tier I capital is $50,000 and Tier II capital is $400,000. Calculate the new (1) amount of risk-adjusted assets, (2) CET1 risk-based ratio, (3) Tier I risk-based capital ratio and (4) total risk-based capital ratio after considering the following transactions separately. (i) The bank issues $2 million of Certificate of Deposits (CDs) and uses the proceeds to finance single family mortgage to individual homeowners. (4 marks) (ii) The bank issues $100,000 of common stock to redeem the preferred stock. (4 marks) (b) Explain the reason for restricted use of Internal Ratings-based Approach and predominance of Standard Approach for accessing credit risk in Basel III. (4 marks) (c) Classify the MOST suitable type of regulations that the following policies belong to. (i) Deposit Insurance Scheme (ii) Minimum capital requirement for obtaining bank license in Hong Kong (iii) Reserve requirement (3 marks

Answer 1

A Note: As per HOMEWORKLIB POLICY, in case of multiple sub-questions, only the first four need to be answered. Kindly post the remaining questions separately. 1 2 3 A) 4 5 1) Amount of risk-adjusted assets = $10m 6 7 2) CET1 risk-based ratio = $500,000 / $10m = 0.05 or 5% 8 93) Tier I risk-based capital ratio = [($500,000 + $50,000) / $10m] = 0.055 or 5.5% 10 11 4 (i) Total risk-based capital ratio: 12 The risk weight for category 1 mortgages with a loan-to-value ratio of 80 percent is 50 percent. 13 Thus, risk-weighted assets increase to $10 million + $2 million (0.5) = $11 million. 14 15 The CET1 ratio decreases to $500,000 / $11 million = 4.54 percent 16 17 The Tier I ratio decreases to $550,000 / $11 million = 5 percent 18 19 The total capital ratio decreases to $950,000 / $11 million = 8.64 percent 20