Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. CET1 capital is $500,000, additional Tier I capital is $50,000, and Tier II capital is $400,000. How will each of the following transactions affect the value of the CET1, Tier I, and total capital ratios? What will the new value of each ratio be?
The current value of the CET1 ratio is 5 percent, the Tier I ratio is 5.5 percent, and the total ratio it 9.5 percent.
a. The bank repurchases $100,000 of common stock with cash.
b. The bank issues $2 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 80 percent.
c. The bank receives $500,000 in deposit and invests them in T-bills.
d. The bank issues $800,000 in common stock and lends it to help finance a new shopping mall.
e. The bank issues $1 million in non qualifying perpetual preferred stock and purchases general obligation municipal bonds.
f. Homeowners pay back $4 million of mortgages with loan-to-value ratios of 40 percent and the bank uses the proceeds to build new ATM's.