This 5 page paper answers questions on a case supplied by the student using information provided to calculate capital requirements for a bank under the Basle Agreement.
Name of Research Paper File: TS14_TEcapreq.rtf
Unformatted Sample Text from the Research Paper:
option is shown as being risk category 1 under the Basle Agreement where there is a 0% conversion. The next stage is to specify an appropriate credit conversion rate for
any off balance sheet transactions. For option one there are no off balance sheet transactions. Therefore as all the $20 million is in a single category where there is a
zero percent this give a zero result, as such this may be a safe decision as there are few implications here. For option two the same process needs to
be followed. Option two looks at using municipal bonds. These are categorized as risk category three with a 50% risk weighting. These are also an on balance sheet transaction so
stage two, with off balance sheet transactions is not relevant. The third stage is to multiple the assets by the risk rating. For this there is the $20 million multiplied
by 50% giving a result of $10 million. This can then be used to assess the capital requirements, Tier 1 requirement is gained by multiplying the $10 million by
4%, giving $400,000, and for the total amount of capital required 8% x $10 million giving $800,000. Option 3 is classified as category four where there is 100% risk
rating. Therefore all $20 million must be used when calculating the capital requirement for this option. The capital requirement for tier 1 will be 4% of $20 million, which is
$800,000 and the total is $1.6 million. In looking at each of these three options each has a different impact on the capital requirements, with option one have
little impact, but option two requiring a total capital requirement of an additional $0.8 million and $1.6 million for option 3. Question 2 The bank will also need