Question
1) The following sources of capital make up A) Common Equity Tier-1 Capital (CET-1) and B) Tier-1 Capital - Check all that apply a. Common
1)
The following sources of capital make up A) Common Equity Tier-1 Capital (CET-1) and B) Tier-1 Capital - Check all that apply
a. Common Equity b. Preferred Equity c. Non-Controlling Minority Interests d. Controlling Interests e. Retained Earnings f. Other Current Income g. Goodwill
2)
Risk Weighted Capital (RWA) is a standardized methodology of assessing a banks balance sheet vs the Total Assets approach. Calculate the CET-1 and Leverage Ratios for the following two hypothetical Banks. Which bank is more profitable in your opinion (why?). Which bank is more risky in your opinion (why?)
Bank1 | Bank2 | |
Short Term Assets, i.e. Liquidity: (Cash or Cash Equivalents) | 500 | 100 |
Long Term Assets, i.e Investments (US Treasury Notes and Bond | 1000 | 5000 |
Other Assets, i.e. Secured Loans (Revolvers/Lines of Credit, Term Loans, Asset Based Lending) | 5000 | 1400 |
OCI (Commissions, Fees, Non-Recurrent Income) | 25 | 25 |
Net Income or Net Earnings | 250 | 50 |
Retained Earnings | 150 | 0 |
RWA | ||
Total Avg Assets | 6500 | 6500 |
Preferred Stock | 250 | 750 |
Common Stock | 750 | 250 |
CET-1 Capital | ||
Tier-1 Capital | ||
CET-1 Capital Ratio | ||
Tier-1 Leverage Ratio |
3)
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Answer Trueor False
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POTUS can fire for cause the Chairman of the FED
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All banks licensed to do business in the US are subject to an annual CCAR stress
testing
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If a bank fails CCAR, they are given the opportunity to repair any deficiency and
re-submit the plan
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The min CET-1 Capital Ratio is 4.5% while the minimum Tier-1 Capital Ratio is
6%
The following questions are based on the chart below
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European Banks are less profitable than their US counterparts
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US Banks have higher operating cost margin
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US vs European banks are equally well capitalized
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US Banks have maintained the size of their balance sheet during 2018-2019
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European Banks have taken more loss provisions during 2018-2019
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European banks drove to profitability by reducing expenses and taking less loss provisions vs their US counterparts in 2018-2019
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