Question

Oldhat Financial starts its first day of operations with $11 million in capital.A total of $120 million in checkable deposits are received. The bank makesa $30 million commercial loan and another $40 million in mortgages with thefollowing terms: 200 standard, 30- year, fixed-rate mortgages with a nominalannual rate of 5.25%, each for $200,000. Assume that required reserves are 8.

a. What does the bank balance sheet look like?
b. How well capitalized is the bank?
c. Calculate the risk weighted assets and risk weighted capital ratio after Oldhat's first day.

Answer 1

a.

Assets Side

Required Reserves $10 million

Excess Reserves $51 million

Loans $70 million

Total $131 million

Liabilities Side

Checkable Deposits $120 million

Bank Capital $11 million

Total $131 million

b. Bank capitalization can be measured with bank Leverage Ratio.

= Capital/Assets

= 11/131

= 8.40%

Bank is considered well capitalized if ratio is above 5% so Oldhat Financial is well capitalized.

c. Risk Weighted Assets = $50 million

Risk weighted capital ratio = 22%

Commercial loans are 100% risk weighted = $ 30 million

Residential mortgages are 50% risk weighted = $ 20 millions

Total = $50 million.

Risk weighted Capital Ratio = Bank capital / Total risk weighted assets

= 11/50

= 22%