Problem: This problem focuses on bank capital management and various capital ratio measures. Following are recent balance sheet accounts for Prime First National Bank. Cash assets $ 17 million Demand deposits $50 million Loans secured by Time and savings real estate 40 deposits 66
Commercial loans 45 Federal funds purchased 15 Government Trust-preferred securities owned 16 securities 2 Goodwill 5 Bank fixed assets 15 Owners’ capital 5 Total assets $138 million Total liabilities $138 million and owners’ capital All amounts are in millions of dollars.
Note: The bank has the loan-loss reserves of $10 million. The real commercial and estate loans shown on the balance sheet are net of loan-loss reserves.
Question:
a. Compute the equity capital ratio. How could the bank raise its equity capital ratio?
b. Risk-adjusted assets are estimated by using the following weightings procedure: government securities and cash _.00; real estate loans _.50; commercial and other loans _ 1.00. Compute the risk-adjusted assets amount for the bank.
c. What actions could the bank management team take to improve the bank’s Tier 1 and Total Capital ratios?