c. Does the bank have enough capital to meet the Basel requirements? If not, what minimum Tier 1 or total capital does it need to meet the requirement?
No, the bank does not have sufficient capital to meet the Basel requirements. It needs total capital of $10.34, of which Tier 1 must be at least $129.25 x 0.04 = $5.17. Further, since perpetual preferred stock is limited to 25 percent ($1.29 million) of Tier 1, the bank needs at least $3.878 million of equity capital. Standby LCs: Foreign exchange contracts: Potential exposure Current exposure Interest rate swaps: Potential exposure Current exposure
$40 x 0.05 = in the money =
$300 x 0.015 = Out-of-the money =
=
$4.5 $2 $8.5 x 0.50 = $4.25 = $129.25 x 0.08 = $10.34
$2 $0
$30 x 0.50 =
$15
= $15
b. What is the total capital required for both off- and on-balance-sheet assets?
Total risk-adjusted on- and off-balance-sheet assets
Total capital required
Thus an additional $1.878 million of equity is necessary to satisfy the Tier 1 requirements.
If Tier I actually equals $5.17, the required Tier II capital also will be $5.17. Of this amount, the remaining perpetual preferred stock of $3.91?3.71 million is counted, which leaves $1.29 million of subordinated debt that can be used to satisfy the Tier II requirement. This amount is available and satisfies the limit of 50% of Tier I rule. (Refer to Table 20-8 for explanations of Tier I and Tier II requirements.)
A new balance sheet after the issuance of the new required equity is shown below. You will note that the total capital now seems to exceed the minimum of $10.34 million. However, only a portion of the subordinated debt can be counted, and this portion will decrease as the maturity approaches.
New balance sheet: Cash
$21.878
Deposits
$175
OECD interbank deposits $25 Mortgage loans Consumer loans Total
$ 70 $70 $186.878 Subordinated debt (over 5 years) $3 Cumulative preferred stock $5 Equity
$3.878 $186.878
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