Suncorp Bank (BBB rated) has the following balance sheet (in millions of dollars) with the counterparty credit ratings and risk weights in parentheses. Assets Liabilities and equity Cash $10Deposits $194 Government bonds (rated AA. 20 Subordinated debt (>10 0% risk weight) years) Interbank deposits, 2 month 25 Non-Cumulative 51 (rated A+, 20% risk-weight) irredeemable preference shares Corporate loans (rated A- 50% 80Ordinary shares risk weight) Fixed assets (100% risk weight) 70 Retained earnings Total assets $205Total liabilities and equity $205 5 4 1 In addition, the bank engages in the following off-balance activities: $40 million in performance-related standby letters of credit to BBB rated corporations (SLCs) (100% risk weight) $100 million in three-year forward FX contracts that are currently out of the money by $2 million $200 million in four-year interest rate swaps that are currently out of the money by $2 million $200 million in nine-year interest rate swaps that are currently in the money by $1 million. All derivatives are written on B rated counterparties (150% risk weight). Credit conversion factors follow: Performance-related SLCs 50% 1-5 year foreign exchange contracts 5% 1-5 year interest rate swaps 0.5% 5-10 year interest rate swaps 1.5% a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel II Accord? (4 marks) b) What are the risk-adjusted off-balance-sheet assets of the bank as defined under the Basel II Accord? (4 marks) c) What are the Tier 1 and Total capital adequacy ratios of Suncorp bank? (4 marks) d) Does the bank have enough capital to meet the Basel II requirements? If not, what minimum Tier 1 or total capital does it need to meet the requirement? (4 marks) e) Suppose the bank decides to withdraw all its interbank deposits and hold the cash. Will the bank have enough capital to meet the Basel II requirements? Explain. (4 marks) Suncorp Bank (BBB rated) has the following balance sheet (in millions of dollars) with the counterparty credit ratings and risk weights in parentheses. Assets Liabilities and equity Cash $10Deposits $194 Government bonds (rated AA. 20 Subordinated debt (>10 0% risk weight) years) Interbank deposits, 2 month 25 Non-Cumulative 51 (rated A+, 20% risk-weight) irredeemable preference shares Corporate loans (rated A- 50% 80Ordinary shares risk weight) Fixed assets (100% risk weight) 70 Retained earnings Total assets $205Total liabilities and equity $205 5 4 1 In addition, the bank engages in the following off-balance activities: $40 million in performance-related standby letters of credit to BBB rated corporations (SLCs) (100% risk weight) $100 million in three-year forward FX contracts that are currently out of the money by $2 million $200 million in four-year interest rate swaps that are currently out of the money by $2 million $200 million in nine-year interest rate swaps that are currently in the money by $1 million. All derivatives are written on B rated counterparties (150% risk weight). Credit conversion factors follow: Performance-related SLCs 50% 1-5 year foreign exchange contracts 5% 1-5 year interest rate swaps 0.5% 5-10 year interest rate swaps 1.5% a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel II Accord? (4 marks) b) What are the risk-adjusted off-balance-sheet assets of the bank as defined under the Basel II Accord? (4 marks) c) What are the Tier 1 and Total capital adequacy ratios of Suncorp bank? (4 marks) d) Does the bank have enough capital to meet the Basel II requirements? If not, what minimum Tier 1 or total capital does it need to meet the requirement? (4 marks) e) Suppose the bank decides to withdraw all its interbank deposits and hold the cash. Will the bank have enough capital to meet the Basel II requirements? Explain. (4 marks)
