Question

A U.S. based commercial bank has the following assets: $150 million in U.S. Treasury securities (0 percent risk-weight category), $450 million in Fannie Mae (FNMC) mortgage backed securities (20 percent risk-weight category), $900 million in home mortgages (50 percent risk-weight category), and $1100 million in commercial loans (100 percent risk-weight category).  This bank has $98 million in Tier 1 capital (e.g., common and preferred equity) and $46 million in Tier 2 capital (e.g., ALL, subordinated debt, etc). Based on the Basel I accord calculations, what is this commercial bank's ratio of TOTAL capital to risk-weighted assets?

	A.	9.11 percent
	B.	None of the other responses are correct
	C.	2.80 percent
	D.	8.78 percent
	E.	5.98 percent

Answer 1

The correct option is D.) 8.78 percent
Risk-weighted assets of bank = 150 Million * 0 % + 450 Million * 20 % + 900 Million * 50 % + 1100 Million * 100 %
= 0 + 90 Million + 450 Million + 1100 Million
= $ 1640 Million
Total capital of bank = 98 Million + 46 Million = $ 144 Million
Total capital to risk-weighted assets ratio of bank = 144 Million / 1640 Million
= 0.0878 i.e., 8.78 % (Option D)