Let's assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts:
Cash _ $5 million
Government securities _ $7 million
Mortgage loans _ $30 million
Other loans _ $50 million
Fixed assets _ $10 million
Intangible assets _ $4 million
Loan-loss reserves _ $5 million
Owners' equity _ $5 million
Trust-preferred securities _ $3 million
Cash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms of riskiness.
a. Calculate the equity capital ratio.
b. Calculate the Tier 1 Ratio using risk-adjusted assets.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk-adjusted assets.