Onshore Bank has $20 million in assets, with risk-weighted assets of $10 million. CET1 capital is $500,000, additional Tier I capital is $50,000, and Tier II capital is $400,000.
How will each of the following transactions affect the value of the CET1, Tier I, and total capital ratios? What will the new value of each ratio be? (LG 13-7)
The current value of the CET1 ratio is 5 percent, the Tier I ratio is 5.5 percent, and the total ratio is 9 percent.
a. The bank repurchases $100,000 of common stock with cash.
b. The bank issues $2 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 80 percent.
c. The bank receives $500,000 in deposits and invests them in T-bills.
d. The bank issues $800,000 in common stock and lends it to help finance a new shopping mall.
e. The bank issues $1 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds.
f. Homeowners pay back $4 million of mortgages with loan-to-value ratios of 40 percent and the bank uses the proceeds to build new ATMs.

AppendixLO1