1.Consider the following numerical example of a risk-weighted assets calculation from the week 10 lecture.

Assets

Risk weights (%)

Total assets

RWA

Liabilities

Housing loans

35

60

21

Deposits

95

Business loans

100

30

30

Capital

5

Liquid assets

0

10

0

Total

100

51

100

RWA = 51

RWKR = 5/51 = 9.8

Unweighted K/A = 5%

Using this example:

(a)show what would happen to the risk-weighted capital ratio if the risk weight on housing loans was

increased to 50%: Risk of bank to get back the money will increase by 50%

reduced to 20%.: Risk of bank to get back the money will decrease by 20%

(b)Explain why regulators prefer to set their main capital requirements in terms of risk-weighted rather than total assets: It better protects the deposit insurance fund.

(c)Explain why Murray concluded that small banks were disadvantaged compared to large banks in the that way risk-weighted assets were calculated: The higher the bank's CAR, the greater the likelihood that it will be able to withstand inflation or other unexpected losses.