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.