Question

Use the following information for questions 1-3:

Asset	Book Value (in millions)
U.S. Treasury securities	$ 100
Municipal general obligation bonds	$100
Residential mortgages	$400
Commercial loans	$200
Total book value	$800

Asset	Risk Weight
U.S. Treasury securities	0%
Municipal general obligation bonds	20%
Residential mortgages	50%
Commercial loans	100%

1. Calculate the credit risk-weighted assets using the following information:

		A. 400
		B. 410
		C. 420
		D. 430

2. Basel I standards require 4% in Tier I capital and 8% in total (Tier I + Tier II) capital. Using the data from the previous question compute the minimum required Tier I capital.

		A. $21 million
		B. $28 million
		C. $32 million
		D. $35 million

3. Basel I standards require 4% in Tier I capital and 8% in total (Tier I + Tier II) capital. Using the data from the previous questions compute the minimum required Tier II capital if the bank has $30 million in Tier I capital.

		A. $3.5 million
		B. $3.6 million
		C. $3.7 million
		D. $3.8 million

Answer 1

1. Risk weighted Assets is a bank's assets or off balance sheet exposures weighted according to risk.

Credit Risk Weighted Assets = $100*0% + $1002*0% + $400*50% + $200*100% = 420

Therefore, the answer is C.

2. Minimum Tier 1 Capital Required = Minimum Percentage* Risk Weighted Assets = 5%*420 = $21 million.

Therefore, the answer is A.

3. Minimum Tier 1 + Tier II Capital Required = Minimum Percentage* Risk Weighted Assets = 8%*420 = $33.6 million

Amount in Tier 1 Capital = $ 30 million

Minimum amount required in Tier II Capital = $33.6 - $30 million = $3.6 million

Therefore, the answer is B.