Question

Onshore Bank has $39 million in assets, with risk-adjusted assets of $29 million. Core Equity Tier 1 (CETI) capital is $1,350,000, additional Tier I capital is $550,000, and Tier II capital is $438,000. The current value of the CET1 ratio is 4.66 percent, the Tier I ratio is 6.55 percent, and the total capital ratio is 8.06 percent. Calculate the new value of CETI, Tier I, and total capital ratios for the following transactions. c. a. The bank repurchases $119,000 of common stock with cash. b. The bank issues $3.9 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 70 percent. The bank receives $519,000 in deposits and invests them in T-bills. d. The bank issues $819,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating. e. The bank issues $2.9 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds. f. Homeowners pay back $5.9 million of mortgages with loan-to-value ratios of 50 percent and the bank uses the proceeds to build new ATMs. 3. Assume that a bank has assets located in Germany worth €300 million earning an average of 9 percent. It also holds €170 in liabilities and pays an average of 7 percent per year. The current spot rate is €1.50 for $1. If the exchange rate at the end of the year is €2.00 for ST: a. What happened to the dollar? Did it appreciate or depreciate against the euro (€)? b. What is the effect of the exchange rate change on the net interest margin (interest received minus interest paid) in dollars from its foreign assets and liabilities? c. What is the effect of the exchange rate change on the value of the assets and liabilities in dollars?

Answer 1

Solution

Core Equity Tier 1 (CET 1) Capital = $ 1,350,000

Additional Tire 1 Capital = $ 550,000

Tier II Capital = $ 438,000

Total capital = 1350000+550000+438000

= $ 2338000

Risk adjusted assets = $ 29000000

Tier 1 ratio (core equity capital + additional Tier 1 Capital) / Risk adjusted assets

Total capital ratio = (core equity capital + additional Tier 1 Capital + Tier II Capital) / Risk adjusted assets

a) When bank repurchased $ 119,000 of common stock with cash, Risk weighted assets will not change since cash has 0 risk weight.

Core equity Tier 1 capital will decrease to = 1350000- 119000 = $ 1231000

So, Core Equity capital ratio = 1231000/29000000 = 4.24%

Tier 1 capital ratio = (1231000 + 550000)/ 29000000 = 6.14%

Total capital ratio = (1231000 + 550000 + 438000)/ 29000000 = 7.65%

b) Bank issues $ 3.9 million od CDs and uses the proceeds to issue category 1 mortagage loans with a loan to value ratio of 70%

Since risk weight of mortagage is 70% increase in risk adjusted assets = $ 0.8*3.9 = $ 3.12 million

Total risk adjusted assets = 29 + 3.12 = $ 32.12 million

CET 1 ratio = 1350000/ (32.12*10^6) = 4.20%

Tier 1 ratio = (1350000 + 55000)/ (32.12*10^6) = 5.92 %

Total capital ratio = (1350000+550000+438000)/(32.12*10^6) = 7.28%

c) Bank receives $ 519,000 and invest in T bills.

Since Treasury Bills are riskless, there will be no change in risk adjusted assets. Therefore all the three ratios reamin the same.

d) Bank issues $ 819000 worth of common stock and lends it to finance a new shopping mall. Develper has A+ credit rating.

Core equity capital increases to (1350000+ 819000 = 2169000)

Tier 1 capital increases to = (2169000 + 550000 = 2719000)

Total Capital increases to = (2169000 + 550000 + 438000 = 3157000)

Since credit rating is A+, loan risk weight is 50% Risk adjusted assets will become

= 29000000 + 0.5* 819000 = 29409500

CET 1 Ratio = 2169000/29409500 = 7.38%

Tier 1 Ratio = 2719000/29409500 = 9.25%

Total Capital Ratio = 3157000/29409500 = 10.73%