Oldhat Financial starts its first day of operations with \($11$million in the capital. A total of \)$120$million in checkable deposits are received. The bank makes a \($30$million commercial loan and another \)$40$million in mortgages with the following terms: $200$standard, $30$-year, fixed-rate mortgages with a nominal annual rate of $5.25\%$, each for $$200,000$. Assume that required reserves are $8\%$.

a. What does the bank balance sheet look like?

b. How well capitalized is the bank?

c. Calculate the risk-weighted assets and risk-weighted capital ratio after Oldhat’s first day.

Bank starts its operations with $9 million worth of capital. Checkable deposits received are worth $130 million. The bank made a $25 million in commercial loans and $50 million in mortgages. The mortgage terms are as follows: 200 standard 30-year fixed-rate mortgages with a nominal annual rate of 5.25 %, each for $200,000. The required reserve is 8%

The Bank O's balance sheet is as follows:

Working notes:

Calculate the required reserves as follows:

Required reserves = Checkable deposits$\times$Required reserve rate

= $\$130$ million $\times$$8\%$

= $\$10.40$million

In a balance sheet, assets must be equal to liabilities. The total liabilities are $\$139$million and so assets are the same. The excess amount is the excess reserve. Calculate the excess reserves as follows:

Excess reserves =Total liabilities - (Required reserves + Commerical loan + Mortgage loan )

= $ 39.00 million - ($ 10.40 million + $ 25.00 million + $ 50.00 million)

= $ 139.00 million -$ 85.40 million

=$ 53.60 million

Bank Capital -$\$9$million

Total assets -$\$139$million

The leverage ratio indicates whether a bank is well capitalized or not. This ratio is equal to the amount of capital divided by the bank's total assets.

A well-capitalized bank's leverage ratio must exceed 5 %. The leverage ratio for Bank O can be calculated as follows:

$\begin{array}{rl}\text{Leverage ratio}& =\frac{\text{Bank capital}}{\text{Total assets}}\\ & =\frac{\mathrm{\$}9\text{million}}{\mathrm{\$}139\text{million}}\\ & =0.0647\text{or}6.47\mathrm{\%}\end{array}$

Therefore, the bank's leverage ratio is 6.47 % which is higher than 5 %, this means that Bank O is well-capitalized.

The weight carry by reserve is equal to zero, thus $ 64 has zero weight. The weight carries by residential mortgages is 50 %. Thus, $25 million in risk-weighted assets. Commercial loans carry 100 % weight. Thus, $ 25 million in risk-weighted assets.

Thus, the total risk-weighted assets are $ 50 million.

Calculate the risk-weighted capital ratio for Bank after the first day as follows:

$\begin{array}{rl}\text{Risk-weighted capital ratio}& =\frac{\text{Bank capital}}{\text{Risk-weighted assets}}\\ & =\frac{\mathrm{\$}9\text{million}}{\mathrm{\$}50\text{million}}\\ & =0.18\text{or}18\mathrm{\%}\end{array}$

Total risk-weighted assets are$\$50$million.

Therefore, Bank's risk-weighted capital ratio after the first day is $18\%$