Third Fifth Bank has the following balance sheet (in millions), with the risk weights in parentheses.
Assets Liabilities and Equity
Cash (0%) $21 Deposits $133
Mortgage loans (50%) 50 Subordinated debt (> 5 years) 1
Consumer loans (100%) 70 Equity 6
Reserve for loan losses (1)
Total assets $140 Total Liabilities and equity $140
In addition, the bank has $20 million in commercial direct-credit substitute standby letters of credit (credit conversion factor is 100%) to a public corporation (risk weight 100%) and $40 million in 10-year FX forward contracts (credit conversion factor is 7.5% and risk weight is 100%) that are in the money by $1 million.
a. What are the risk-weighted on-balance-sheet assets of the bank as defined under the Basel III? (2 marks)
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b. What is the CET1, Tier I, and total capital required for both off- and on-balance-sheet
assets? (4 marks)
c. Disregarding the capital conservation buffer, does the bank have sufficient capital to meet the Basel requirements? How much in excess? How much short? (2 marks)
d. Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement? If not, what minimum CET1, additional Tier 1, or total capital does it need to meet the requirement? (2 marks)