Question

The following entries (in millions of dollars) are from the balance sheet of Revendell National Bank (RNB):

U.S. Treasury bills Demand deposits Mortgage-backed securities Loans from other banks C&I loans Discount loans NOW accounts Savings accounts Reserve deposits with Federal Reserve Cash items in the process of collection Municipal bonds Bank building

$35 65 30 8 67 5 42 10 8 10 5 4

a. What is RNB’s capital/asset ratio? Assuming the capital requirement is 10%, does the bank meet the requirement? Show your work. (10 points)

b. What is RNB’s capital/risk-adjusted asset ratio given the risk factors below? Assuming the capital requirement of this ratio is 25%, does the bank meet this requirement? Show your work. (15 points)

Reserves: 0

Securities (Mortgage-backed): 0.5

Securities (Municipal bonds and Treasury bills): 0.1

C&I loans: 0.8

Answer 1

The below entries are taken as capital

Reserve deposits with Federal Reserve 8 Reserve 10 Bank building 4

Total =22

Below are categorised as assets

Assets
Mortgage-backed securities	30
C&I loans	67
Discount loans	5
Cash items in the process of collection	10
Municipal bonds	5
U.S. Treasury bills	$35

Total ; 152

Ratio: 22/152 = 14%

b)

Assets
Mortgage-backed securities	15
C&I loans	53.6
Discount loans	5
Cash items in the process of collection	10
Municipal bonds	0.5
U.S. Treasury bills	3.5
	87.6

Ratio = 22/87.6 = 25.11%