Question

Bank regulators, using the CAMELS ratings criteria, observed the following about banks A and B:
Bank A has a 16 percent capital ratio and uses a large proportion of its assets to invest in high risk real estate loans. Bank B has an 9 percent capital ratio and uses a large proportion of its assets to invest in Treasury bills and bonds. How would Bank A be rated versus Bank B using the capital adequacy and asset quality criteria?

a. Bank B is perceived as safer by both criteria.

b. Bank A is perceived as safer by both criteria.

c. Bank B is perceived as safer according to capital adequacy but more risky according to asset quality.

d. Bank A is perceived as safer according to capital adequacy but more risky according to asset quality.

Answer 1

Bank with higher capital ratio is considered as a safe bank as it is well above the capital requirements and it can save itself from solvency risk.

Bank with high proportion of its assets in treasury bills and bonds would be safer than a bank with high proportion of its assets in in real state bonds which is commercial and high risky.

Bank A has better capital ratio and Bank B has better asset quality at it is invested into treasury bills and bonds.

Rest of the statement state otherwise, so the correct answer is option ( d)

So, the correct answer is option ( d).