National Bank has the following balance sheet (in millions) and has no off-balance-sheet activities:

Assets Liabilities

Cash $20 Deposits $980

Treasury bills 40 Subordinated debentures 40

Residential mortgages 600 Common stock 40

Business loans (BB rated) 430 Retained earnings 30

Total assets $1,090 Total liabilities and equity $1,090

a. What is the leverage ratio?

b. What is the CET 1 risk-based ratio? c. What is the Tier 1 risk-based capital ratio? d. What is the total risk-based capital ratio?

e. In what capital risk category would National Bank be placed?

Answers below

Explanation:

a) What is the CET1 risk-based ratio?

Ans: - CET1 risk-based ratio = ($45 + $40) / $1,090 = 0.07798 or 7.798 percent.

b) What is the Tier 1 Risk-based capital ratio?

Ans: - Risk-adjusted assets = $20x0.0 + $40x0.0 + $600x0.5 + $430x1.0 = $730.

Tier I capital ratio = ($45 + $40) / $730 = 0.11644 or 11.644 percent.

c) What is the total risk-based capital ratio?

Ans: - The total risk-based capital ratio = ($25 + $45 + $40) / $730 = 0.150685 or 15.07 percent.

d) What is the leverage ratio?

Ans: - leverage ratio = ($45 + $40) / $1,090 = 0.07798 or 7.798 percent.

e) In what capital risk category would National Bank be placed?

Ans: - The bank would be place in the well-capitalized category.