A bank reports the following items on its latest balance sheet: allowance for loan losses, $52 million; undivided profits, $101 million; subordinated debt, $5 million; common stock and premium, $30 million; equity notes, $3 million; minority interest in subsidiaries, $6 million; mandatory convertible debt, $7 million; identifiable intangible assets, $8 million; and noncumulative perpetual preferred stock, $5 million; cash, $250 million; Treasury securities, $180 million; residential real estate loans, $350 million; and corporate loans, $425 million. Its off-balance-sheet items include standby credit letters, $50 million, and long-term credit commitments to corporations, $150 million. 1. What crucial roles does capital play in the management and viability of a financial firm? 2. What forms of capital are in use today? What are the key differences between the different types of capital? 3. What is the rationale or the reason for having regulators set capital standards for financial institutions as opposed to letting the private marketplace set those standards? 4. Are you with or against having regulations over the banking sector? Justify your answer giving supporting arguments. 5. How much risk weighted assets does the bank hold? 6. How much capital does the bank hold in each type of capital? 7. Would you consider the above bank have too much capital or not? Based on your answer, is this good or bad? Justify your answer. A bank reports the following items on its latest balance sheet: allowance for loan losses, $52 million; undivided profits, $101 million; subordinated debt, $5 million; common stock and premium, $30 million; equity notes, $3 million; minority interest in subsidiaries, $6 million; mandatory convertible debt, $7 million; identifiable intangible assets, $8 million; and noncumulative perpetual preferred stock, $5 million; cash, $250 million; Treasury securities, $180 million; residential real estate loans, $350 million; and corporate loans, $425 million. Its off-balance-sheet items include standby credit letters, $50 million, and long-term credit commitments to corporations, $150 million. 1. What crucial roles does capital play in the management and viability of a financial firm? 2. What forms of capital are in use today? What are the key differences between the different types of capital? 3. What is the rationale or the reason for having regulators set capital standards for financial institutions as opposed to letting the private marketplace set those standards? 4. Are you with or against having regulations over the banking sector? Justify your answer giving supporting arguments. 5. How much risk weighted assets does the bank hold? 6. How much capital does the bank hold in each type of capital? 7. Would you consider the above bank have too much capital or not? Based on your answer, is this good or bad? Justify your
