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solution

Case

CALCULATING CAPITAL REQUIREMENTS

A bank’s balance sheet information is listed below (in $000).

1. What is the bank’s risk-adjusted asset base under Basel III?

2. To be adequately capitalized, what are the bank’s CET1, Tier I, and total risk–based capital requirements under Basel II?

3. Using the leverage ratio requirement, what is  the minimum regulatory capital required to keep the bank in the well- capitalized zone?

4. Disregarding the capital conservation buffer, what is the bank’s capital adequacy level (under Basel III) if the par value of its equity is $225,000, surplus value of equity is $200,000, qualifying perpetual preferred stock is $50,000, subordinated debt is $50,000, and loan loss reserve is $85,000? Does the bank meet Basel (CET1, Tier I, and total) adequate capital standards? Does the bank comply with the well capitalized leverage ratio requirement?

5. Does the bank have enough capital to meet the Basel requirements, including the capital conservation buffer requirement?

The bank’s various lines of business produced the following gross income:

Retail banking                                    $40,000

 Commercial banking                      50,000

 Payment and settlement            15,000

 Trading and sales                            5,000

 Asset management                       10,000

What is the add-on to capital for operational risk? Does the bank have sufficient capital to cover this add-on and remain adequately capitalized, while meeting the capital conservation buffer?

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