Third Bank has the following balance sheet (in millions), with the risk weights in parentheses.
|
Assets
|
Liabilities and Equity
|
|
Cash (0%)
|
$20
|
Deposits
|
$175
|
|
OECD interbank deposits (20%)
|
25
|
Subordinated debt (5years)
|
3
|
|
Mortgage loans (50%)
|
70
|
Cumulative preferred stock
|
5
|
|
Consumer loans (100%)
|
$70
|
Equity
|
$2
|
|
Total assets
|
$185
|
Total liabilities and equity
|
$185
|
The cumulative preferred stock is qualifying and perpetual. In addition, the bank has $30 million in performance-related standby letters of credit (SLCs) to a BB _ -rated corporation, $40 million in two-year forward FX contracts that are currently in the money by $1 million, and $300 million in six-year interest rate swaps that are currently out of the money by $2 million. Credit conversion factors follow:
Performance-related standby LCs 50%
1- to 5-year foreign exchange contracts 5%
1- to 5-year interest rate swaps 0.5%
5- to 10-year interest rate swaps 1.5%
a. What are the risk-adjusted on-balance-sheet assets of the bank as defined under the Basel Accord?
b. What is the total capital required for both off- and on-balance-sheet assets?
c. Does the bank have enough capital to meet the Basel requirements? If not, what minimum Tier I or total capital does it need to meet the requirement?