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A banks balance sheet information is shown below (in $000). On Balance Sheet Items Face Value Cash $121,600 Short-term government securities (<92 days.) 5,400 long-term government securities (>92 days) 414,400 Federal Reserve stock 9,800 Repos secured by federal agencies 169,000 Claims on U.S. depository institutions 937,900 Loans to foreign banks, OECD CRC rated 2 1,640,000 General obligations municipals 170,000 Claims on or guaranteed by federal agencies 26,500 Municipal revenue bonds 102,900 Residential mortgages, category 1, loan-to-value ratio 75% 5,000,000 Commercial loans 4,667,669 Loans to sovereigns, OECD CRC rated 3. 11,600 Premises and equipment 455,000 Conversion Face Off Balance Sheet Items: Factor Value U.S. Government Counterparty: Loan commitments: < 1 year 20% $300 1-5 year 50% 1,140 Standby letters of credit: Performance-related 50% 200 Direct-credit substitute 100% 100 U.S. Depository Institutions Counterparty: Loan commitments: < 1 year. 20% 100 > 1 year 50% 3,100 Standby letters of credit: Performance-related 50% 200 Direct-credit substitute 100% 56,400 Commercial letters of credit: 20% 400 State and Local Government Counterparty: (revenue municipals) Loan commitments: >1 year 50% 100 2 Copyright 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Standby letters of credit: Performance-related 50% 135,400 Corporate Customer Counterparty: Loan commitments: < 1 year 20% 3,212,300 >1 year 50% 3,046,278 Standby letters of credit: Performance-related 50% 101,543 Direct-credit substitute 100% 490,900 Commercial letters of credit: 20% 78,978 Sovereign Counterparty: Loan commitments, OECD CRC rated 1: < 1 year 20% 110,500 >1 year 50% 1,225,400 Sovereign Counterparty: Loan commitments, OECD CRC rated 2: < 1 year 20% 85,000 >1 year 50% 115,500 Sovereign Counterparty: Loan commitments, OECD CRC rated 7: >1 year. 50% 30,000 Interest rate market contracts: (current exposure assumed to be zero.) < 1 year (notional amount) 0% 2,000 > 1-5 year (notional amount) 0.5% 5,000 1. What is the bank's risk-adjusted asset base under Basel III? Find the appropriate risk-weight for the off-balance sheet items using Table 21-7 (for the risk weights, you use Table 21-7 for BOTH on- and off-balance sheet items). Hint: For OBS market contracts, the appropriate risk-weight is 1 or 100%. 2. To be adequately capitalized, what are the bank's CET1, Tier I, and total risk-based capital requirements under Basel III? Hint: Refer to Table 21-3. 3. Using the leverage ratio requirement, what is the minimum regulatory capital required to keep the bank in the adequately-capitalized zone? Hint: Refer to Table 21-3. 3 . No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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 $215,000, surplus value of equity is $210,000, retained earnings is $585,545, qualifying perpetual preferred stock is $60,000, subordinate debt is $55,000, and loan loss reserve is $80,000? Does the bank meet Basel (CET1, Tier I, total, and leverage) 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?\

Table 21-3: Specifications of Capital Categories for Prompt Corrective Action

(2) 3) (4) 1) CET1 Tier | Risk- Total Risk- Tier | Risk-Based Based Based Leverage Capital Directive/ Zone Ratio Ratio Ratio Ratio Other 1. Well capitalized 6.5% or and 8% or and 10% or and 5% or and Not subject to a capital above above above above directive to meet a specific level for any capital measure 2. Adequately capitalized 4.5% or and 6% or and 8% or and 4% or and Does not meet the above above above above definition of well

capitalized 3. Undercapitalized Under 4.5% or Under6% or Under8% or Under 4% 4. Significantly undercapitalized Under 3% or Under4% or Under6% or Under3% 5. Critically undercapitalized Tangible equity/Total assets < 2%

Table 21-6: Summary Definitions of Qualifying Capital for Depository Institutions

Source: "Basel 111: A Global Regulatory Framework for More Resilient Banks and Banking Systems, Bank for International Settlements, June 2011, anabis org

Common Equity Tier | Capital (CET1)

Common shares issued by the bank and stock surplus that meets the criteria for classification as common shares for regulatory purposes.

Stock surplus (share premium) resulting from the issue of instruments included in Common Equity Tier 1. Retained earnings

Accumulated other comprehensive income and other disclosed reserves.

Common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e., minority interest)

that meet the criteria for inclusion in common equity Tier | capital.

Regulatory adjustments applied in the calculation of Common Equity Tier 1.

Additional Tier | Capital

+ Instruments with no maturity dates or incentives to redeem but may be callable by issuer after 5 years only if replace instrument with better capital.

+ Stock surplus (share premium) resulting from the issue of instruments included in Common Equity Tier 1.

- Tier | minority interest, not included in the banking organization's common equity Tier | capital.

+ Regulatory adjustments applied in the calculation of Additional Tier 1 Capital.

Tier Il Capital

Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1

capital).

Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital.

Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Tier 2 capital and are not included in Tier 1 capital.

Certain loan loss provisions. Regulatory adjustments applied in the calculation of Tier 2 Capital.

.

.

* For example, unrealized gains on AFS equity securities. losses related to defined benefit pension obligations.

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Table 21-7: Risk Weights for Calculating Risk-Adjusted Assets for General Credit Risk under Basel III

Somat Fade! Righter, 010, October 11, 2013

Risk Weight Exposures {in percentages) 1. Exposures to sovereigns

Exposures to the LLS. government An Exposure to the LLS. government, its central Donk, of a LS. goveimment gency {] Thx podtion of an expos thal is directly and uncondricnoly guaranteed by th Li} ULE, gesnarnmennt, its central bank, ora LLS. government agency The postion of an exposure that is conditionally guaranteed by the LLS) government, 20 its central bands, of a LS. government agency

Cher SoVETENgN EXpOsunes: CRC of O=1 Li} CRC of 2 20 CRC of 3 50 CRC of 4-6 00 CRC of 7 150 CECE member with no CRC [1] Hon-OECD member with no CRC 120 Sovereign default 150

2. Exposures to certain supranational entities and multilateral development banks (MDBs) An exposure to the BIS the ECB, the European Commission, the IMF, or an MOE [+] 3. Exposures to government-sponsored entities (GSEs) An expasurs 10a GSE other than an equity exposure of preferred Siok 20 An exposure to preferred stock sued by a GSE 100 4. Exposures to depository institutions, foreign banks, and credit unions

Exposures to LLS. deposhony Insitutions and credit unions 20

Exposures to forgign banks: CRC of 0-1 20 CRC of 2 50 CRC ol 3 100 CRC of 4=T 150 OECD member with no CRC 20 Hon-OECD member with no CRC 100 Sovereign chefault 150.

5. Exposures to public sector entities (PSEs):

General obligation exposuncs to US. PSES 20

Revenue obligation exposures lo LIS. PSEs 50

General obligation exposes to non-LLS. PSEs: CRC of 0-1 20 CRC of 2 50 CRC of 3 00. CRC of d=T 150 GECD member with no CRE 20 Non-CECD member vith no CRE 160 Sowveraign defaull 150

frenoned)

5

Revenue obligation exposures to non-US. PSEs:

CRC of 0-1 50

CRC of 2-3 100

CRC of 4=7 150

OECD member with no CRC 50

Non-OECD member with no CRC 100

Sovereign default 150 6. Corporate exposures

All corporate exposures, including bonds and loans 100 7. Residential mortgage exposures

An exposure to a first-lien residential mortgage with lower risk, or category 1 50

(mortgage that meets prudential underwriting standards, including standards relating to loan- to-value ratio, are not 90 days or more past due, and that are not restructured or modified) An exposure to a first-lien residential mortgage with higher risk, or category 2 (all other 100 residential mortgage exposures)

8. Presold construction loans and statutory multifamily mortgages

Exposures to presold construction loans and statutory multifamily mortgage 50 9. High-volatility commercial real estate (HVCRE) An HVCRE exposure 150 10. Past due exposures An exposure that is not guaranteed or that is unsecured 150

11. Other assets Cash owned and held; gold bullion held in the bank's own vaults or held in another depository 0 institution's vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities; and exposures that arise from the settlement of cash transactions

Cash items in the process of collection 20 All assets not specifically assigned a different risk weight, including deferred acquisition 100 costs (DAC) and value of business acquired (VOBA)

Deferred tax assets (DTAs) arising from temporary differences that the bank could realize 100 through net operating loss carrybacks

Portion of mortgage servicing assets (MSAs) and DTAs arising from temporary differences 250

that the bank could not realize through net operating loss carrybakcs that are not deducted from common equity tier 1 capital

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Table 21-9: Credit Conversion Factors for Off-Balance Sheet Contingent or Guaranty Contracts, Basel 111

Guarantees, repurchase agreements, forward agreements, credit-enhancing representa- tions, and warranties that are not securitization exposures, off-balance-sheet securities lending and borrowing transactions (100%)

Financial standby letters of credit (100%)

Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance-related standby letters of credit (50%)

Unused portion of loan commitments with original maturity of one year or less (20%)

Unused portion of loan commitments with original maturity of more than one year (50%)

Trade-related (commercial) letters of credit (20%)

Unused loan commitments that are unconditionally cancelable (0%)

Table 21-10: Conversion Factors for OBS Derivative Contracts Used in Calculating Potential Future Exposure

Sources: "Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements, Office of the Comptroller

of the Currency, Treasury, June 2012, wanpocegor;, Board of Governors of the Federal Reserve System, June 2012, wu federalreserve.gov; and the Federal Deposit Insurance Corporation, wannfiic.gov, june 2012. 0} (2) 3) 4) (5) (6) @) Credit Exchange Contracts Credit Contracts Precious Interest Rate Rate (investment (non-investment Equity Metals Remaining Maturity Contracts Contracts grade) grade) Contracts Contracts Other 1. Less than one year 0.0% 1.0% 5.0% 10.0% 6.0% 7.0% 10.0% 2. One to five years 0.5 5.0 50 10.0 8.0 7.0 12.0 3. Over five years 115; 75 50 10.0 10.0 8.0 15.0

Table 21-11: Capital Conservation Buffer, Capital Ratio Levels, and Maximum Payout Ratios

.

Capital Maximum Payecut Ratios Conservation CET1 Capital Tier | Capital Total Capital (expressed as a percentage Buffer (%) Ratio (%) Ratio (%) Ratio (%) of earnings) 0.000-0.625 4.500-5.125 6.000-6.625 8.000-8.625 0% >0.625-1.250 >5.125-5.750 >6.625-7.250 >8.625-9.250 20 >1.250-1.875 >5.750-6.375 >7.250-7.875 >8.250-9.875 40 >1.875-2.500 >6.375-7.000 >7.875-8.500 >9.875-10.500 60 > 2.500 > 7.000 > 8.500 > 10.500 No payout ratio limitation 7

Table 21-12: Countercyclical Buffer, Capital Ratio Levels, and Maximum Payout Ratios

Maximum Payout Ratios

Capital Conservation Plus Countercyclical CET1 Tier | Capital Total Capital (expressed as a percentage Buffer (%) Capital Ratio (%) Ratio (%) Ratio (%) of earnings) 0.00-1.25 4.50-5.75 6.00-7.25 8.00-9.25 0% > 1.25-2.50 >5.75-7.00 >7.25-8.50 >9.25-10.50 20 >2.50-3.75 >7.00-8.25 >8.50-9.75 >10.50-11.75 40 >3.75-5.00 >8.25-9.50 >9.75-11.00 >11.75-13.00 60 > 5.00 >9.50 > 11.00 > 13.00 No payout ratio limitation

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