New Bank has the following balance sheet (in millions of dollars) and has no off-balance-sheet or securitisation activities. Assets Liabilities and equity Cash $60 Deposits $2650 Commonwealth bonds 120 Subordinated debt 120 Residential mortgages 1800 Retained earnings 90 Business loans 1000 Common equity 120 Total assets $2980 Total liabilities and equity $2980 (a) What is the dollar value of the three regulatory capital amounts held by New Bank (i.e. common equity Tier 1, total Tier 1, total capital) (3 marks) (b) What is the value of total credit-risk-weighted assets? (Note: risk weights are Cash 0%, Commonwealth bonds 0%, mortgages 50%, Business loans 100%) (3 marks) (c) Assuming that operational risk, market risk and other types of risk are zero, calculate the three capital adequacy ratios. (3 marks) (d) Identify and briefly explain three functions of a bank's capital. (3 marks) (e) Why do exchange-traded derivative security contracts have no capital requirements, whereas over-the-counter derivative contracts do? (2 marks) (f) What reason explains why the regulatory credit conversion factors for the risk exposure of some contracts (eg. foreign exchange) are greater than for others (eg interest rate)? (2 marks) (g) Why do regulators not want banks to act as option writers? (2 marks) (h) Why are regulators more concerned with the levels of capital held by an Fl compared to a non-financial institution? (2 marks) New Bank has the following balance sheet (in millions of dollars) and has no off-balance-sheet or securitisation activities. Assets Liabilities and equity Cash $60 Deposits $2650 Commonwealth bonds 120 Subordinated debt 120 Residential mortgages 1800 Retained earnings 90 Business loans 1000 Common equity 120 Total assets $2980 Total liabilities and equity $2980 (a) What is the dollar value of the three regulatory capital amounts held by New Bank (i.e. common equity Tier 1, total Tier 1, total capital) (3 marks) (b) What is the value of total credit-risk-weighted assets? (Note: risk weights are Cash 0%, Commonwealth bonds 0%, mortgages 50%, Business loans 100%) (3 marks) (c) Assuming that operational risk, market risk and other types of risk are zero, calculate the three capital adequacy ratios. (3 marks) (d) Identify and briefly explain three functions of a bank's capital. (3 marks) (e) Why do exchange-traded derivative security contracts have no capital requirements, whereas over-the-counter derivative contracts do? (2 marks) (f) What reason explains why the regulatory credit conversion factors for the risk exposure of some contracts (eg. foreign exchange) are greater than for others (eg interest rate)? (2 marks) (g) Why do regulators not want banks to act as option writers? (2 marks) (h) Why are regulators more concerned with the levels of capital held by an Fl compared to a non-financial institution? (2 marks)
