Question

If Tier 1 capital is 10M, total assets are 100M, total equity is 25M, short term liabilities are 10M, and credit risk adjusted assets are 50M, then the Tier 1 capital ratio is:

a) 10%
b) 20%
c) 25%
d) 40%

Answer 1

The Tier 1 capital ratio is calculated by dividing Tier 1 capital by credit risk-adjusted assets, resulting in a ratio of 20% in this instance. Option b is the correct answer.

Step-by-step explanation:

The question revolves around the calculation of the Tier 1 capital ratio, which is a key measure of a bank's financial strength from a regulator's point of view.

The Tier 1 capital ratio is defined as the ratio of a bank's core Tier 1 capital, which is its most liquid and secure types of capital, against its total credit risk-adjusted assets.

To calculate it, you divide the Tier 1 capital by the credit risk-adjusted assets. In this case, if Tier 1 capital is $10M and the credit risk-adjusted assets are $50M, the Tier 1 capital ratio is $10M / $50M, which equals 0.20 or 20%.