##### Homework help, Problem Set #1 The attached spreadsheet has the assets and liabilities of a G-SIFI bank, Big Bank

Problem Set #1

The attached spreadsheet has the assets and liabilities of a G-SIFI bank, Big Bank. Below those basic balance sheet values, you will find a breakdown of the major components of key balance sheet items by type, type of customer, and/or risk class. The breakdowns also include loan commitments, an off-balance sheet item that requires capital, and both the replacement cost of derivatives from the asset side and the notional amounts of derivatives (from both assets and liabilities). We also assume that loans are generally granted on conventional market terms.

Step 1: Compute the risk-weighted assets of the bank.

For simplicity, we streamline the capital requirements somewhat. We consider a credit risk rating system of 1 to 5, as well as an unrated bucket, and use the standardized weights in the table below.

Please use the following matrix to assign weights to the various asset exposures:

Rating Class/Type of exposure Sovereign Other Government Entity Banks Corporates

Class 1 (roughly equivalent to AAA) 0% 20% 20% 20%

Class 2 (roughly equivalent to AA+ to A-) 20% 50% 50% 50%

Class 3 (roughly equivalent to BBB+ to BBB-) 50% 50% 50% 100%

Class 4 (roughly equivalent to BB+ to B-) 100% 100% 100% 100%

Class 5 (below B-) 150% 150% 150% 150%

Unrated 100 100% 100% 100%

Other risk weights of relevance for determining risk weighted assets:

Type of Exposure Risk Weight

Retail credit (credit cards, overdraft lines) meeting standard criteria 75%

Unrated small business or small-medium enterprise lending 85%

Residential real estate with loan to value ratio between 80% and 90% 45%

Residential real estate with loan to value ratio of more than 90% 55%

Long-term commitments to lend 50%

Short-term commitments (not unconditionally cancelable) 10%

Subordinated debt of corporates 150%

Equity of corporates 250%

Commercial Real Estate Risk Weight of the Borrower/Counterparty

All else 100%

Assumptions/Computation Guide:

Deposits with Banks: Assume the banks where funds are deposited are all Risk Class 2.

Fed funds sold and securities purchased under resale agreements (repo): Assume Risk Class 2.

Securities borrowed: Assume counterparties are Risk Class 2.

Trading assets in the balance sheet is the sum of the positive replacement cost of derivatives broken out below the balance sheet and the breakdown below of other trading assets (such as securities trading inventories). The positive replacement cost is weighted by the counterparty Risk Class.

In addition, you must compute the potential future exposure of the derivatives, using the notional amounts in the derivatives breakdown table using the following matrix. Note that the notional amounts are reported in billions, instead of millions. The PFE is computed by multiplying the notional amount (the face value) of the derivatives by a supervisory factor, depending on the type of derivative, and then multiplied by the counterparty risk class weight. For simplicity, we assume no netting of derivatives and give no credit for collateral.

Type of Derivative Credit Risk Class (for single name credit derivatives) or commodity type Supervisory Factor to Determine Potential Future Exposure

Interest Rate 0.4%

Foreign Exchange 4.0%

Credit (single name) Class 1 0.4%

Class 2 0.4%

Class 3 0.5%

Class 4 1.25%

Class 5 6%

Credit Index Investment Grade .4%

Equity Index 20%

Commodities Oil/gas 18%

Metals 18%

Agricultural 18%

Securities held in portfolio and loans are broken by issuer/borrower below the balance sheet.

Loan commitments are broken out immediately after loans. These commitments, which do not appear on the balance sheet, represent credit exposures that need to be included in risk-weighted assets.

Risk weighted assets will equal the sum of the weighted balance sheet items, plus the weighted potential future credit exposure of derivatives and the weighted loan commitments.

2. Compute the denominator of the Basel III leverage measure, also known as the Basel III leverage exposure measure. (This requires adding in the potential future exposure of derivatives assets and liabilities to total assets and the credit exposure from loan commitments.)

3. Compute CET1, Tier 1, and Total Capital. Compute capital/risk-weighted assets for each of these capital measures. Compute capital/Basel III leverage exposure measure for each of these capital ratios.

Does the firm meet the standard minimum requirements?

4. Compare the CET1, Tier1 and Total Capital requirements to the required minimum for this G-SIFI bank taking into account the capital conservation buffer and a systemic risk surcharge of 2 percent. Does the bank meet its capital requirements?

5. To compute the bank’s liquidity coverage ratio (LCR), compute High Quality Liquidity Assets.

6. Compute the bank’s cash outflows under the LCR, using the following schedule of run-off rates (in 30 days):

Type of Outflow Assumed Run-Off Rate

Stable (and Insured) Retail Deposits 3%

Less Stable Deposits 10%

Operational Deposits 25%

Short-Term Wholesale Funding (reverse repos, securities lent, commercial paper, etc.) 100%

Derivatives 5% of notional value

Drawdown of committed lines of credit 50%

7. Compute the bank’s liquidity coverage ratio, using HQLA, your computation of the bank’s expected cash outflows, and 75 percent of cash outflows as the measure of cash inflows.

8. Compute the bank’s NSFR.

For assets such as deposits, fed funds sold, securities borrowed and other small asset categories, you can assume the assets are short-term.

Assume long-term loan commitments have a maturity of one year.

Assume 90 percent of the derivatives potential future exposure is over one year.

Use the following table to compute the Available Stable Funding.

ASF Factor Components of ASF Category

100 percent Total Regulatory Capital

Other Capital and Liabilities with a maturity of one year or more

95 percent Stable non-maturity deposits and terms deposits with residual maturity of less than one year provided by retail and small business customers

90 percent Less stable non-maturity deposits and terms deposits with residual maturity of less than one year provided by retail and small business customers

50 percent Funding with residual maturity of less than one year by nonfinancial corporates

Operational deposits

Funding by sovereigns and development banks

Other funding with maturity between 6 months and one year

0 percent All other