Question

based on the following information measure the capital adequacy of cosmopolite using the risk adjusted capital standards. tier capitol is 60 million and tier II captiol is 15millon.

FINA4600 Capital Adequacy Problems taken from: Gardner and Mills 3d edition, Dryden Press, 1994) 1. Based on the following Information, measure adjusted capital standards. Tier I capital is $60 million and Tier ll capitai the Fed's minimum core capital to total asset ratio. Does the institu not, suggest several ways management might address the shotfall. the capital adequacy of Cosmopolitan Bank using risk is $15 million. Also cons ider 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 20 75 740 Subordinated Debt Common Stock Retained Eamings $850 15 10 905 Total 905 Off Balance Sheet Items: Long-term Loan Commitments Interest Rate Swap Agreements $200 million $ 30 million Calculate Landmark's risk-adjusted capital ratios b Calculate Landmark's core capital to total assets ratio. Determine Landmark's capital adequacy rating.

Answer 1

1. Capital adequacy ratio can be calculated as the ratio of sum of Tier 1 capital and Tier 2 capital and Risk Weighted assets.

CAR= (Tier 1 capital + Tier 2 capital) / Risk Weighted Assets

Risk Weighted Assets are mostly off balance sheet items.

Hence CAR= (60+15) / (30+75+200)

CAR= 25%

Institution meets the minimum standards as the minimum required CAR is 8%

2. a. Risk adjusted capital ratio= Total adjusted capital / Risk Weighted Assets

Total Adjusted capital is the sum of equity and near equity instruments adjusted by their equity content= $30 million (Common stock)

Risk Weighted Assets are mostly off balance sheet items

Risk adjusted ratio= 30/(200+30)=13%

b. Core capital consists of equity capital and declared reserves $40 million (Common stock + retained earnings)

Core capital to Total Assets Ratio =  40/905 = 4%