Question

based on the following information measure the capital adequacy of cosmopolite bank using the risk adjusted capital standards. tier capitol is 60 million and tier II capitol is 15 million. also consider not, suggest several ways Management might address the shortfall.

eC FINA4600 Capital Adequacy Problems taken from: Gardner and Mills 3d edition, Dryden Press, 1994) 1. Based on the following information, measure the capital adequacy of adjusted capital standards. Tier I capital is $60 million and Tier ll capital the Fed's minimum core capital to Does the not, suggest several ways management might address the shtntfall. Cosmopolitan Bank using fisk is $15 million. Also cons ider oal asset ratio. Does the institution meet minimum standards? If BALANCE SHEET ASSETS LIABILITIES AND EQUITY Cash Short-term Treasury securities Long-term Treasury securities Municipal GO bonds Corporate bonds Commercial loans Residential mortgages Consumer loans $ 10,000,000 28,000,000 243,500,000 150,000,000 50,000,000 320,000,000 400,000,000 Total Assets 1,401,500,000 Off Balance Sheet Items: Cancellable loan commitments Standby letters of credit Forward agreements $ 30,000,000 75,000,000 200,000,000 2. Landmark Savings and Loan has the following Balance Sheet (in millions of dollars): [Note: Due to severe economic difficulties in Landmark's region, $50 million of the mortgage loans are in default.] Landmark S&L Balance Sheet Assets Liabilities and Equity Cash and Reserves Treasury Securities Mortgages Fixed Assets 75 740 70 905 Subordinated Debt Common Stock Retained Eamings $850 10 905 Total Off Balance Sheet items: Long-term Loan Commitments Interest Rate Swap Agreements $200 million $ 30 million a. Calculate Landmark's risk-adjusted capital ratios. Calculate Landmark's core capital to total assets ratio. Determine Landmark's capital adequacy rating

Answer 1

1.Risk adjusted captil ratio calculation

= Risk weighted assets/total adjusted captial

Total adjusted captial= 10+30( common stock+retained earnings)

Risk weighted assets=20(cash)

=20/30*100=66.667

2. Calculate core captial to asset ratio

=Core captial /total asset   

= 10+30/905 *100= 4.21

3. Captial adequacy rating

=Tier1+tier2/risk weighted assets

=40+15/20 =2.75