(A)A Bank Has Risk-Weighted Assets of $175 and Equity of $12.5

question 56

Essay

(a)A bank has risk-weighted assets of $175 and equity of $12.5. If regulators require a minimum risk-weighted capital ratio of 5 percent given the current level of equity,how many new assets with a 100 percent risk weight can the bank add? How many with a 50 percent risk weight?
(b)If the bank had 20 percent more equity,how many new assets with a 100 percent risk weight could the bank add? How many with a 50 percent risk weight? How does having more equity affect a bank's ability to grow? How is this growth affected by the riskiness of the bank's assets?

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Definitions:

Average Cost Methods

A cost-flow assumption for inventory valuation, where the cost of goods sold and ending inventory are calculated based on the average cost of all units available for sale.

Gross Profit

The difference between sales revenue and the cost of goods sold, before deducting overhead, payroll, taxation, and interest payments.

Ending Inventory

The aggregate value of products on hand for selling when an accounting cycle concludes.

Gross Profit

The difference between revenues and the cost of goods sold before deduction of operating expenses, interest, and taxes.