Question

Capital Two Bank has $33 million in assets, with risk-adjusted assets of $23 million. Core Equity Tier 1 (CET1) capital is $1,050,000, additional Tier I capital is $370,000, and Tier II capital is $426,000. The current value of the CET1 ratio is 4.57 percent, the Tier I ratio is 6.17 percent, and the total capital ratio is 8.03 percent.

1. The bank repurchases $95,000 of common stock with cash. What is the new CET1 ratio?
2. The bank issues $5.5 million of CDs and uses the proceeds to issue category 1-mortgage loans with a loan-to-value ratio of 70 percent. The risk weight of this type of mortgage is 50%. What is the new Tier 1 Ratio?
3. The bank receives $700,000 in deposits and invests them in T-bills. What is the new Total Capital Ratio?
4. The bank issues $900,000 in common stock and lends it to help finance a new office building. The developer has an A+ credit rating. The risk weight of this type of loan is 100%. What is the new Total Capital Ratio?

Answer 1

a. CET1 reduces to 955,000 [ 1050000-95000]

New CET1 ratio = CET1 capital / Risk adjusted assets =  955,000 / 23,000,000 = 4.15%

b. Risk weighted assets increase = 23 million + 5.5 *0.5 = 25.75 million

New Tier 1 ratio = (1,050,000 +370,000)/ 25.75 million = 5.51%

c. Investing in T bills the risk weighted assets remain same since the T bills have zero risk.

New total capital ratio = 8.03%

d. Tier 1 Capital increases to= 1,050,000 +370,000 + 900,000 = 2,320,000

Risk weighted assets increase to = 23million + 900,000(1) = 23.9 million

Total capital = 2,320,000 + 426,000 = 2,746,000

New Total capital ratio = 2,746,000 / 23.9million = 11.49%