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    Chapter 16 - Selected Quantitative Problems & Solutions

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    This document contains solutions to 3 quantitative problems related to bank balance sheets, capital ratios, and risk-weighted assets. The first problem compares the FDIC payoff method versus purchase and assumption method for insuring a $150,000 deposit, finding the latter fully protects the deposit while the former only protects 90%. The second calculates risk-weighted assets of a bank based on its asset classes. The third calculates a bank's capital ratio and risk-weighted assets both before and after committing to a $10 million commercial loan.

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    Chapter 16 - Selected Quantitative Problems & Solutions

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    This document contains solutions to 3 quantitative problems related to bank balance sheets, capital ratios, and risk-weighted assets. The first problem compares the FDIC payoff method versus purchase and assumption method for insuring a $150,000 deposit, finding the latter fully protects the deposit while the former only protects 90%. The second calculates risk-weighted assets of a bank based on its asset classes. The third calculates a bank's capital ratio and risk-weighted assets both before and after committing to a $10 million commercial loan.

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    20121113-Selected-Quantitative-Problems-Solutions

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    This document contains solutions to 3 quantitative problems related to bank balance sheets, capital ratios, and risk-weighted assets. The first problem compares the FDIC payoff method versus purchase and assumption method for insuring a $150,000 deposit, finding the latter fully protects the deposit while the former only protects 90%. The second calculates risk-weighted assets of a bank based on its asset classes. The third calculates a bank's capital ratio and risk-weighted assets both before and after committing to a $10 million commercial loan.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    26 views2 pages

    Chapter 16 - Selected Quantitative Problems & Solutions

    Uploaded by

    分享区
    This document contains solutions to 3 quantitative problems related to bank balance sheets, capital ratios, and risk-weighted assets. The first problem compares the FDIC payoff method versus purchase and assumption method for insuring a $150,000 deposit, finding the latter fully protects the deposit while the former only protects 90%. The second calculates risk-weighted assets of a bank based on its asset classes. The third calculates a bank's capital ratio and risk-weighted assets both before and after committing to a $10 million commercial loan.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Chapter 16 - Selected Quantitative Problems & Solutions

     Quantitative Problems
    1. Consider a failing bank. A deposit of $150,000 is worth how much if the FDIC uses the
    payoff method? The purchase and assumption method? Which is more costly to tax
    payers?
    Solution: Under the payoff method, large deposits pay better than $0.90/dollar. In this
    case, the $150,000 is worth better than $150,000  0.90  $135,000. Under
    the purchase and assumption policy, the bank is completely absorbed, and all
    accounts are worth their
    full value.
    Upfront, the second method will have a lower cost to the insurance fund.
    However, if depositors fear loss under the payoff method, they are less likely
    to maintain account balances in excess of $100,000 in a single bank.

    2. Consider a bank with the following balance sheet:

    Assets Liabilities
    Required Reserves $ 8 million Checkable Deposits $100 million
    Excess Reserves $ 3 million Bank Capital $ 6 million
    T-bills $45 million
    Mortgages $40 million
    Commercial Loans $10 million

    Calculate the bank’s risk-weighted assets.


    Solution: Reserves and T-bills have a zero weight. So, $56 million has zero weight.
    Mortgages carry a 50% weight. RW Assets  $40 million  0.50  $20
    million.
    Commercial loans carry a 100% weight. RW Assets  $10 million.
    Total risk-weighted assets  $30 million.

    3. Consider a bank with the following balance sheet:

    Assets Liabilities
    Required Reserves $ 8 million Checkable Deposits $100 million
    Excess Reserves $ 3 million Bank Capital $ 6 million
    T-bills $45 million
    Commercial Loans $50 million

    The bank commits to a loan agreement for $10 million to a commercial customer.
    Calculate the bank’s capital ratio before and after the agreement. Calculate the bank’s
    risk-weighted assets before and after the agreement.
    Solution: Before the agreement, the capital ratio  6/106  5.66%. Since the loan
    agreement has no accounting transaction, the capital ratio is the same after.
    For risk-weighted assets:
    Reserves and T-bills have a zero weight. So, $56 million has zero weight.
    Commercial loans carry a 100% weight. RW Assets  $50 million.
    Total risk-weighted assets  $50 million.
    After the loan agreement, risk-weighted assets:
    Reserves and T-bills have a zero weight. So $56 million has zero weight.
    Commercial loans carry a 100% weight. RW Assets  $50 million.
    Commercial loan commitments are at 100%. RW Assets  $10 million
    Total risk-weighted assets  $60 million.
    The actual risk-weighted assets for the loan commitment may vary depending
    on the terms of the commitment and other factors. However, under the idea of
    risk-weighted assets, the $10 million would be correct.

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