The structure of assets for a commercial bank is as follow.

Items Balance Percentage

(billion dollar) (%)

Cash 17.97 12.4

Cash equivalent 8.82 6.1

Bonds (risky) 40.83 28.1

Loans (risky) 72.95 50.3

Other (risky) 4.52 3.1

Total 145.09 100

The primary capital and secondary capital of the bank are $5 billion and $9.5 billion,

respectively.

Recently, bad loan rate of the whole banking system has risen rapidly due to bad

macroeconomic environment. In protecting the interests of depositors and

consumers, the central bank has strengthened its supervision over commercial

banks by raising the primary capital adequacy ratio and secondary capital adequacy

ratio from 4% and 8% to 5% and 10%respectively.

Required

1.Explain the three principles of commercial banks' operation and describe the performance of the bank in the question from its assets structure.

2.State the capital adequacy rule and its main objective.

3.Calculate the primary and secondary capital adequacy ratio for the bank and explain

how the bank meets the new capital requirements of the central bank