FIN 350 Homework Help GCU

[hsmth2]

10. Let's assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts:
Cash $ 5 million
Government securities $ 7 million
Mortgage loans $30 million
Other loans $50 million
Fixed assets $10 million
Intangible assets $ 4 million
Loan loss reserves $ 5 million
Owners' equity $ 5 million
Trust preferred securities $ 3 million

Total: $119 million

Cash asserts and government securities are not considered risky. Loans secured by real estate have a 50% weighting factor while all the other loans have a 100% weighing factor in terms of riskiness.

a. Calculate the equity capital ratio:
I ended up getting the following-
Equity Capital Ratio = Owners' equity / Total
Equity Capital Ration = $5 million / $119 million
Equity Capital Ratio = 0.04202
b. Calculate the Tier 1 Ratio using risk - adjusted assets:
I am not sure exactly what to do here so any help would be appreciated.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk adjusted assets.
Once again I am not sure what to do here as well.

Like I said any help would be useful.

 

[JeffM]

10. Let's assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts:
Cash $ 5 million
Government securities $ 7 million
Mortgage loans $30 million
Other loans $50 million
Fixed assets $10 million
Intangible assets $ 4 million
Loan loss reserves $ 5 million
Owners' equity $ 5 million
Trust preferred securities $ 3 million

Total: $119 million

Cash asserts and government securities are not considered risky. Loans secured by real estate have a 50% weighting factor while all the other loans have a 100% weighing factor in terms of riskiness.

a. Calculate the equity capital ratio:
I ended up getting the following-
Equity Capital Ratio = Owners' equity / Total
Equity Capital Ration = $5 million / $119 million
Equity Capital Ratio = 0.04202
b. Calculate the Tier 1 Ratio using risk - adjusted assets:
I am not sure exactly what to do here so any help would be appreciated.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk adjusted assets.
Once again I am not sure what to do here as well.

Like I said any help would be useful.

Does your book give you simplified rules for doing these calculations, or are you supposed to use the actual regulations, which are extremely involved?

If you are supposed to use your book's rules, you will need to tell us in full what they are.

If you are supposed to use the actual regulations, the current rules for risk-based capital adequacy can be found at

http://www.ecfr.gov/cgi-bin/text-id...view=text&node=12:2.0.1.1.9.10.3.3.15&idno=12

I should tell you that the actual standards applied during bank examinations are far more rigorous than the regulatory minima although the method of computation is the same.

Edit How in the world do you get assets of 119? Cash 5, Governments 7, Gross (?) Loans 80, Fixed Assets 10, Intangibles 4 gives me

Gross (?) Assets 106 = 5 + 7 + 80 + 10 + 4.

 

[hsmth2]

Update!

Does your book give you simplified rules for doing these calculations, or are you supposed to use the actual regulations, which are extremely involved?

If you are supposed to use your book's rules, you will need to tell us in full what they are.

If you are supposed to use the actual regulations, the current rules for risk-based capital adequacy can be found at

http://www.ecfr.gov/cgi-bin/text-id...view=text&node=12:2.0.1.1.9.10.3.3.15&idno=12

I should tell you that the actual standards applied during bank examinations are far more rigorous than the regulatory minima although the method of computation is the same.

Edit How in the world do you get assets of 119? Cash 5, Governments 7, Gross (?) Loans 80, Fixed Assets 10, Intangibles 4 gives me

Gross (?) Assets 106 = 5 + 7 + 80 + 10 + 4.

I am not sure exactly what to use. Here is what our professor told us:

Calculations of risk-adjusted assets:

Selected assets:
Cash
Government Securities
Mortgage Loans
Other Loans
Total

Weighted:
$ Amount x Weight = Amount

Tier 1 capital =
Risk-adjustment assets =
Tier 1 ratio =

I hope that helps.

 

[hsmth2]

Problem Done!

Thank you for your help. I was finally able to get it figured out. I was doing my math wrong somewhere and once I realized that it was pretty simple.

I am not sure exactly what to use. Here is what our professor told us:

Calculations of risk-adjusted assets:

Selected assets:
Cash
Government Securities
Mortgage Loans
Other Loans
Total

Weighted:
$ Amount x Weight = Amount

Tier 1 capital =
Risk-adjustment assets =
Tier 1 ratio =

I hope that helps.