Your bank is providing a $30,000,000 loan to an BBB- rated corporate client. Refer to the information below.

Bank's objective - ROE 22% before tax

Current Loan Interest rate: 8%

Average unused interest charge $ Nil

Application fee: $ Nil

Marginal cost of non-equity funds: 0.15%

Annual loan service fees: $100,000

Capital ratio: 9.5%

Average Demand deposits with bank $6,000,000

Interest paid on Demand deposits 0.3%

Average Term deposits $3,000,000

Interest rate on Term deposits 1.65%

Reserve requirements on deposits Demand deposit - 10%, Term deposit - 10%

Cost of providing services (by Loan Dept.) $85,000

Loan risk weighting 130%

a. What interest rate would you need to charge to exactly achieve the bank's objective (show working) ?

b. Using your new calculated interest rate, assume that the cost of non equity funds increases by 0.85% and APRA also increases the capital ratio to 12%. Re-calculate the resulting new loan interest rate

c. Explain why a global regulator prefer a bank maintain high levels of capital ratio. In your answer, describe how this decision has resulted in a different interest rate in part a. and b.