Assets Liabilities & Capital Risk Weight for Assets Reserves 10 Checkable Deposi
ID: 1203657 • Letter: A
Question
Assets Liabilities & Capital Risk Weight for Assets
Reserves 10 Checkable Deposits 60 Reserves 0%
Tbills 5 Saving Account 97 Tbills 0%
Agence MBS 50 Capital 8 Agency MBS 20%
Loan 100 Loan 100%
Total 165 Total 165
Assume the required reserve is 10% and the capital requirement is 5%, does this bank meet the regulation on reserves and capital?
Suppose that 5% of loan is written off (loan cannot be collected). Does this bank still meet the regulation on capital?
Assume some depositors of bank A transfer $5 mil from their saving accounts to an another bank. Recommend one solution for bank A so they can comply with reserves requirement
Explanation / Answer
(1)
(i) Required reserves = Checkable deposits x 10% = 60 x 10% = 6
Since reserves = 10, the required reserves provision is being maintained.
(ii) Required capital = Loan x 5% = 100 x 5% = 5
Since capital = 8, the required Capitals provision is being maintained.
(2)
If 5% of loan is written of, Both loan & Capital fall by 5% x 100 = 5.
New required capital = 5% x New loan = 5% x (100 - 5) = 5% x 95 = 4.75
Actual capital will be (8 - 5) = 3, which is lower than required capital of 4.75. So the condition will not be met.
(3)
This transfer will reduce savings accounts by 5. Reserves will fall by 5 as well, and new reserves = 10 - 5 = 5.
One possible solution is to increase loan by 5, by engaging in higher credit lending.