Question
A commercial bank has provided the balance sheet below. It has no off-balance sheet activities. Commercial loans have a 100% loan-to-value risk weight and construction
A commercial bank has provided the balance sheet below. It has no off-balance sheet activities. Commercial loans have a 100% loan-to-value risk weight and construction loans have a 50% loan-to value risk weight.
Assets ($ millions) Liabilities and Equity ($ millions)
Cash $ 32 Deposits $ 945
U.S. Treasury securities 84 Subordinated debentures 62
Commercial loans 755 Common stock 34
Construction loans 184 Retained earnings 14
Total Assets $ 1,055 Total Liabilities and Equity $ 1,055
a. Calculate each of the following ratios. For each ratio, also explain which capital category zone the bank falls into. (6 points each)
i. CET1 risk-based capital ratio
ii. Tier I risk-based capital ratio
iii. Total risk-based capital ratio
iv. Tier I leverage ratio
b. Given your calculations and the capital categories in a., what prompt corrective actions will be required of the bank by its regulators? Explain. (5 points)
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