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Question One Total 20 marks 4 4 10 Assets Value ($ million) Liabilities and Equity Value ($ million) Cash (0%) 42 Deposits 352 OECD interbank

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Question One Total 20 marks 4 4 10 Assets Value ($ million) Liabilities and Equity Value ($ million) Cash (0%) 42 Deposits 352 OECD interbank deposits (20%) 50 Subordinated debt (5 years) Mortgage loans (50%) 140 Cumulative preferred stock Consumer loans (100%) 140 Reserve for loan losses (2) Equity Total assets 370 Total liabilities and equity 370 The cumulative preferred stock is qualifying and perpetual. In addition, the bank has $60 million in performance-related standby letters of credit (SLCs) to a public corporation, $80 million in two-year forward FX contracts that are currently in the money by $2 million, and $600 million in six-year interest rate swaps that are currently out of the money by S4 million. According to the Basel Accord, the credit conversion factors follow: Performance-related standby LCs 50% 1- to 5-year foreign exchange contracts 5% 1- to 5-year interest rate swaps 0.5% 5- to 10-year interest rate swaps 1.5% The capital adequacy ratio Adequately capitalized zone Well capitalized zone CET1 capital 4.5% Tire I capital 6% 8.5% Total capital required 8% 10.5% 7% The risk weights of the assets are in the parentheses in the table. Required: a. What are the risk-weighted on-balance-sheet assets of the bank as defined under the Basel Accord? (3 marks) b. To be adequately capitalized, what are the CET1, Tier I, and total capital required for both off- and on- balance sheet assets? (4 marks) Disregarding the capital conservation buffer, does the bank have enough capital to meet the Basel requirements of adequately capitalized zone? If not, what minimum CET1, additional Tier 1, or total capital does it need to meet the requirement? Work out the new balance sheet. (6 marks) d. Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement (i.e.: well capitalized zone)? If not, what minimum CET1, additional Tier 1, or total capital does it need to meet the requirement? Work out the new balance sheet. (7 marks) C

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