Bank Financials

Question 1

What are 𝑇𝑜𝑡𝑎𝑙 𝐵𝑎𝑛𝑘 𝐴𝑠𝑠𝑒𝑡s made up of?

Answer 1

They are made up of Total bank liabilities and bank capital

Question 2

What are the 4 assets of a bank

Answer 2

1) Cash
2) Securities
3) Loans
4) Other

Question 3

What are the 3 liabilities of a bank?

Answer 3

1) Checkable Deposits
2) Non-transaction deposits
3) Borrowings

Question 4

What is bank capital

Answer 4

It is insurance against insolvency

• It is the cushion banks have against sudden drops in the value of their assets or an unexpected withdrawal of liabilities
• lt is required by banks to absorb unexpected losses that arise.

Question 5

What does a bank’s capital structure consist of?

Answer 5

A bank’s capital structure consists of Tier 1 Capital and Tier 2 Capital

Question 6

What is Tier 1 capital calculated as?

Answer 6

Tier 1 capital is calculated as Common Equity Tier 1 capital (CET1) plus additional tier 1 capital (AT1)

i.e CET1 + AT1

Question 7

How is the CET1 ratio calculated?

Answer 7

CET1 Ratio = Common Equity Tier 1 Capital/Risk-weighted Assets

Question 8

What does it mean when the CET1 ratio is high?

Answer 8

It indicates that the bank has a significant buffer to absorb potential losses without endangering insolvency.

Question 9

What does it mean when the CET1 ratio is low?

Answer 9

It indicates that the bank has less capacity to absorb losses, which could increase insolvency in event of significant shocks

Question 10

What is the Basel requirement for the CET1 ratio

Answer 10

It is a ratio of 4.5%