Question

According to Basel agreement, the minimum of Tier I capital is 4% of the implied risky position of bank assets. Consider bank A whose assets consist of i) AAA rated debt of $1 million with a risk weight of 20%; ii) CCC+ rated debt of $2 million with a risk weight of 150%.

The minimum Tier I capital required for bank A is

A) $0.2 million B) $3.2 million C) $0.128 million D) $0.256 million

Answer 1

Answer is option C.  $0.128 Million

Information given: -

minimum of Tier Capital = 4% of implies risky position of bank assets.

assets;

1. AAA rated debt

Market value = $1 million

Risk weight = 20%

2. CCC+ rated debt

Market value =$2 million

Risk weight = 150%

calculations: -

implied risky position of bank assets = (market value of asset 1 * risk weight of asset 1) + (market value of asset 2* risk weight of asset 2)

=(1 million * .2)+ (2 million * 1.5)

= .2 + 3

=3.2 million

The minimum Tier I capital required for bank A is:

implied risky position of bank assets * minimum of Tier Capital

= 3.2 million * 4%

=0.128 million