The Balance Sheet of Njenge bank as at 31 December 2017 is as follows:

Assets	K million	Liabilities	K million
Cash in hand	923	Issued & paid up capital	200
Balances with central banks (1)	8986	Reserves & surplus (5)	54464
Balances with banks abroad (2)	80526	Deposits	110568
Investments in Govt securities (3)	35428	Borrowings from banks	66084
Loans and overdrafts (4)	104362	Other liabilities	532
Fixed assets	942
Other assets	681
Total assets	231848	Total Liabilities	231848

Memorandum Item: K million

Inward bills held for collection 8,231

(1) Balances with central banks comprise: Rating K million

Banque de France AAA 3212

Bank of England AAA 4921

Central bank of Madgascar B- 534

Bank of Uganda BB+ 319

(2) Balances with banks abroad comprise:

HSBC London AAA 30241

Credit Lyonnais, Paris A+ 20212

ABSA, Johannesburg BBB- 3424

Other banks Unrated 26649

(3) Investments in Government Securities comprise:

Government of Kenya Bills BB+ 13421

Government of India bonds BBB- 5683

Other Unrated 4514

(4) Twenty per cent of the loans and overdrafts are claims collateralized by cash deposits placed with Njenge bank. Other claims are:

Rating K million

Company X AAA 13421

Company Y BB- 3211

Company Z A+ 11345

Other corporates Unrated 10218

Residential loan 15000

Regulatory retail portfolio 30294.6

(5) Reserves and Surplus include:

K'million

Retained Profit 34281

Statutory reserves 200

General provision 4521

Revaluation reserves 3210

Undisclosed reserves 12252

Additional Notes:

Risk weights

AAA to AA-

A+ to A-

BBB+ to BBB-

BB+ to B-

Below B-

Unrated

Claims on sovereigns and central banks

0%

20%

50%

100%

150%

100%

Claims on banks

20%

50%

50%

100%

150%

50%

AAA to AA-

A+ to A

BBB+ to BB-

Below BB-

Unrated

Claims on corporates

20%

50%

100%

150%

100%

Claims included in the regulatory retail portfolios have a risk-weight of 75%.

- Claims secured by residential property have a risk weight of 35%.

- Other assets are risk weighted at 100%.

- Cash in hand and claims collateralized by cash in the same currency have a supervisory risk weight of 0%.

You are required to:

(i) Prepare a statement showing the computation of the capital adequacy ratio of Njenge bank as at 31 December 2017

using the Standardized Approach of Credit Risk of Basel II. (16 marks)

(ii) Comment on your result. (4 marks)

(iii) Differentiate between Supervisory Review (Pillar 2) and Market Discipline (Pillar 3) of Basel II. (10 marks)