FIN 4100
Management of Financial Institutions
Spring 2019
Assignment 5 – capital adequacy
You may work individually or with one other person on this assignment. Please show enough of your work that I can determine how you obtain your answers, (e.g, by turning in the spreadsheet you use to do the calculations).
1. A depository institution that has the following assets with weights as indicated:
$875 million in commercial loans with one to three years maturity (100%);
$105 million in long term treasuries (0%);
$635 million loans secured by 1-4 family first mortgages (35%);
$12 million cash items in collection (20%);
$200 million in cash and reserves (0%);
$500 million in mortgage backed securities guaranteed by US government agencies (20%);
$285 million in multifamily mortgages (50%);
$250 million in consumer loans (100%);
$65 million in state and local governments bonds (20%); and
$25 million in loans that are 90 days or more past due (150%).
a. How much Common Equity Tier 1 capital must the depository institution have to be considered adequately capitalized?
. How much Tier 1 capital must the depository institution have to be considered adequately capitalized?
c. How much total Tier 1 and Tier 2 capital must the depository institution have to be considered adequately capitalized?
d. Assume the depository has Tier 1 capital as determined in part a, what is the maximum amount of total liabilities the depository institution can have and be considered adequately capitalized according to the Tier 1 leverage ratio.
2a. If a securities firm has net worth of $145 million, what is the maximum market value of its assets?
. If the firm from part a has assets as indicated in part a, what requirement must the firm meet with regard to the liquidity of those assets?
3. If a property/casualty insurance company has risk-based assets as indicated in the table below, how much equity must it have?
Risk category
Description
Risk adjusted charge (millions)
R0
Property-casualty affiliates
2.5
R1
Assets -fixed income
35
R2
Assets - equity
25
R3
Credit risk on receivables
5
R4
Underwriting risk – loss and LAE reserves with growth surcharge
50
R5
Underwriting risk – written premiums with growth surcharge
35
R6
Catastrophe – hu
icane
5
R7
Catastrophe - earthquake
7.5
4. If a life insurance company has risk-based assets as indicated in the table below, how much equity must it have?
Risk category
Description
Risk adjusted charge (millions)
C0
Asset risk – affiliates
4.25
C1
C1cs
Asset risk – Common stock
7.50
C!o
Asset risk – Other investments
3.50
C2
Insurance risk
9.00
C3
C3a
Credit risk
4.75
C3
Interest rate risk
6.35
C3c
Market risk
3.60
C4
C4a
Business risk
4.00
C4
Administrative risk
1.25