Question

Based on the following table, does the bank have sufficient Tier 1 capital according to the Basel III standards? Recall: Tier 1 standard (including capital conservation buffer) is 8.5% and Tier 1+Tier 2 standard (including capital conservation buffer) is 10.5%. Risk-Weight Assets ($M) Risk-Weighted Category Assets ($M) 1500 20% 450 90 50% 1,000 100% 1,000 TOTAL Risk-Weighted Assets | 1,590 Capital (SM) 120 50 0% Tier 1 Tier 2 500 1,000 Yes Ο Νο

Answer 1

Solution :

Tier 1 cap => Tier 1 cap consists mainly of the share capital and disclosed reserves

Tier 2 => Subordinated debt and is supplementary capital

Both are expressed as a percentage of the risk weighted assets.

Its given that the standard says that the Tier 1 capital should be 8.5% and in the given case is : 120 / 1590 = .0754 = 7.54% so the bank doesn't have sufficient Tier 1 capital

Tier 1+ Tier 2 Capital standard -> 10.5

We have -> 170 /1590 = .1069 = 10.69% i.e. Tier1+2 capital is more then what's needed as per the standard. So the answer is Yes