Question

You are a bank examiner for the Office of the Comptroller of the Currency. You have just inspected the books of the First National Bank of Northridge, and you find that its Tier 1 risk-based capital ratio is at 4,8%. First National is considered:

1. Well capitalized.
2. Adequately capitalized.
3. Undercapitalized.   
4. Significantly undercapitalize
5. Critically undercapitalized.

Answer 1

• Tier 1 capital, under the Basel Accord, measures a bank's core capital.
• Under Basel III, banks and financial institutions must maintain a minimum Tier 1 capital ratio to ensure against unexpected losses.
• The Tier 1 capital ratio measures a bank's financial health, its core capital relative to its total risk-weighted assets (RWA).

Tier -1 Capital:

• Tier 1 capital includes a bank's shareholders' equity and retained earnings. Risk-weighted assets are a bank's assets weighted according to their risk exposure. For example, cash carries zero risk, but there are various risk weightings that apply to particular loans such as mortgages or commercial loans. The risk weighting is a percentage that's applied to the corresponding loans to achieve the total risk-weighted assets. To calculate a bank's tier 1 capital ratio, divide its tier 1 capital by its total risk-weighted assets.
• Regulators use the tier 1 capital ratio to determine whether a bank is well capitalized, undercapitalized, or adequately capitalized relative to the minimum requirement.

The minimum tier 1 capital ratio is 6%.

• Consequently, the bank's tier 1 capital ratio is MORE THAN 6%, and it is considered to be well-capitalized compared to the minimum requirement.
• the bank's tier 1 capital ratio is LESS THAN 6%, and it is considered to be undercapitalized compared to the minimum requirement as per tier 1 capital ratio under Basel III.
• the bank's tier 1 capital ratio Is Equal To 6%, and it is considered to be adequately capitalized because it is equal to the minimum tier 1 capital ratio.
• the bank's tier 1 capital ratio is SIGNIFICATLY LESS THAN to 6%, and it is considered to be Significantly undercapitalize.

• So here , First National Bank of Northridge tier 1 capital is 4.8% means the bank's tier 1 capital ratio is LESS THAN 6%, and it is considered to be undercapitalized compared to the minimum requirement as per tier 1 capital ratio under Basel III.

So option C is correct.