Question

You are given the following information with respect to the asset categories of the British Bank.

• Cash with the bank 1 = 100,000
• Cash with the bank 2 = 150,000
• Cash with the bank 3 = 95,000
• Mortgages = 1,700,000
• Medium term corporate loans = 3,500,000
• Long term corporate loans = 1,980,000
• Standby letters of credit = 2,650,000

You need to calculate the minimum capital required for British bank based on Basle I rules.

Answer 1

The minimum capital requirement under the British Bank is based on Risk-weighted Assets of the Bank.

Therefore, Risk-Weighted Assets is an adjusted total asset figure that recognises that the different assets held by banks have different risk profiles.

Per Basel I rules the minimum capital requirement for Bank is 8% of Risk-weighted assets.

Calculation of Risk Weighted Assets
Asset Type	Outstanding Amount	Risk Weight	Risk Weighted Asset
Cash with Bank 1	100,000	20%	20,000
Cash with Bank 2	150,000	20%	30,000
Cash with Bank 3	95,000	20%	19,000
Mortgages	1,700,000	150%	2,550,000
Medium term Corporate Loans	3,500,000	100%	3,500,000
Long term Corporate Loans	1,980,000	100%	1,980,000
Standby letters of credit	2,650,000	100%	2,650,000
Total risk Based Assets			10,749,000
Minimum Capital requirement under Basel I is 8%
Therefore Minimum Capital requirement (10,749,000*8%)	859,920