FA Analysis of Financial institutions

Question 1

Basel 3

Answer 1

1. Minimum capital requirement - the minimum % of risk -weighted assets that a bank must fund with equity capital
2. Minimum Liquidity - a bank must hold enough high quality liquid assets to cover its liquidity needs in a 30day liquidity stress scenario
3. Stable funding - Minimum amount of stable funding relative to the liquidity needs over a one year horizon

Question 2

CAMELS

Answer 2

1. Capital adequacy
   - proportion of the bank’s assets funded with capital
   - Assets are adjusted based on their risk (Riskier assets - higher weighting)
   eg. cash - 0% corporate loans- 100% other >100%

Question 3

Common equity tier 1 captial

Answer 3

must be at least 4.5% of risk weighted assets (Total tier 1 capital must be at least 6% of risk weighted assets)
Most loss absorbing form of capital
places shareholder’s fund at risk of loss first

includes: common stock/surplus over issuance valve, retained earnings etc

Question 4

Tier 2 capital

Answer 4

instruments that are subordinate to depositor’s and to general creditor’s + original minimum maturity of five years (total capital tier 1 + tier 2) must be at least 8% of risk weighted asset

Question 5

Asset Quality

Answer 5

Pertains to the amount of credit risk associated with the assets

Question 6

Management capabilities

Answer 6

Identifying profit opportunities while managing risk (Credit/Market/Operating)

• Strong governance structure
• Sound internal controls
• Financial reporting quality

Question 7

Earnings

Answer 7

High q