Third Fifth Bank has the following balance sheet (in millions) with the risk weights inparentheses.AssetsLiabilities and EquityCash (0%)$ 21Deposits$133Mortgage loans (50%)50Subordinated debt (> 5 years)1Consumer loans (100%)70Equity6Reserve for loan losses(1)Total liabilities and equity$140Total assets$140In addition, the bank has $20 million in commercial direct-credit substitute standby lettersof credit to a public corporation and $40 million in 10-year FX forward contracts that are inthe money by $1 million.(a) What are the risk-adjusted on-balance-sheet assets of the bank as defined underBasel III?(b) What is the CET1, Tier I, and total capital required for both off- and on-balance-sheet assets?(c) Disregarding the capital conservation buffer, does the bank have sufficient capitalto meet the Basel requirements? How much in excess? How much short?(d) Does the bank have enough capital to meet the Basel requirements, including thecapital conservation buffer requirement? If not, what minimum CET1, additionalTier I, or total capital does it need to meet the requirement?

The financial assessment of Third Fifth Bank under Basel III standards involves calculating…

Answered: Third Fifth Bank has the following…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

Third Fifth Bank has the following balance sheet (in millions) with the risk weights in
parentheses.
Assets
Liabilities and Equity
Cash (0%)
$ 21
Deposits
$133
Mortgage loans (50%)
50
Subordinated debt (> 5 years)
1
Consumer loans (100%)
70
Equity
6
Reserve for loan losses
(1)
Total liabilities and equity
$140
Total assets
$140
In addition, the bank has $20 million in commercial direct-credit substitute standby letters
of credit to a public corporation and $40 million in 10-year FX forward contracts that are in
the money by $1 million.
(a) What are the risk-adjusted on-balance-sheet assets of the bank as defined under
Basel III?
(b) What is the CET1, Tier I, and total capital required for both off- and on-balance-
sheet assets?
(c) Disregarding the capital conservation buffer, does the bank have sufficient capital
to meet the Basel requirements? How much in excess? How much short?
(d) Does the bank have enough capital to meet the Basel requirements, including the
capital conservation buffer requirement? If not, what minimum CET1, additional
Tier I, or total capital does it need to meet the requirement?

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