Chapter 15 describes the management of capital in a depository institution and the tasks capital…

Chapter 15 describes the management of capital in a depository institution and the tasks capital performs. The regulators have capital adequacy requirements that depository institutions must meet to continue operations. This chapter describes how to calculate three different capital adequacy ratios that are then used to place an institution in one of five capital adequacy categories. Each category determines permissible activities. For instance, for a bank holding company to be certified as a financial holding company (FHC) as outlined in the Gramm-Leach-Bliley Act, all the banks within the holding company must be well capitalized. Part One of this assignment examines the capital ratios in aggregate for the depository institutions in your BHC. Another role of capital is to support the growth of an institution. In this

chapter we learn to calculate the internal capital growth rate (ICGR). The internal capital growth rate measures how fast the bank can allow its assets to grow without reducing its capital-to-assets ratio. In Part Two we will calculate ICGRs and discuss growth opportunities or limitations.Data Collection: You will once again access data at the FDIC’s Web site at www4.fdic.gov/sdi/ for your BHC. Use SDI to create a two-column report of your bank’s information—a column for each year. In this part of the assignment, for Report Selection use the pull-down menu to select the “Performance and Condition Ratios” report, where you will find the three capital ratios and your internal capital growth rate computed for you. (What a nice surprise, given the tedious process of calculating risk-weighted assets.) Enter this data in your year to-year comparison spreadsheet as illustrated using BB&T’s information.

A. Using the information in rows 89–91 determine the capital adequacy category of the aggregation of banks (BHC as defined by the FDIC’s SDI) for each year.

B. Create a clustered column chart using the chart function in Excel to compare the columns of rows 89–91. An example of such a chart illustrates the capital adequacy ratios for BB&T for year-end 2007 and 2006, as follows:

for all banks in participating countries based on Tier 1 and Tier 2 capital and the risk-weighted assets of each bank. Choose five large banking firms listed in Market Insight. How well capitalized are these banks relative to Basel’s requirements? Do you see any apparent weaknesses? Are there other facts you’d like to know before relying exclusively on the capital ratios you have just calculated to make a judgment?

C. Write a paragraph interpreting the capital adequacy ratios for your BHC. A paragraph describing the above chart was written as follows: U.S. Federal Regulators have five capital-adequacy categories for depository institutions determined by the ratios illustrated in the above exhibit. In 2007 and 2006, BB&T’s ratios placed the BHC in the well-capitalized category. Their leverage ratio was 7.01 percent in 2007, slightly below the 7.33 percent level at the conclusion of 2006. Their Tier 1 risk-based capital ratio was 8.78 percent in 2007, down from 9.23 percent in 2006. And their total risk-based capital ratio was 11.10 percent in 2007, slightly below the 11.28 percent of 2006. Maintaining the foregoing capital ratio

implies a well-capitalized institution, meaning BB&T can continue to operate with no significant regulatory restrictions on its expansion.

Part Two: Evaluating the Internal Capital Growth Rate

 A. This chapter concludes with a discussion of raising capital internally and externally. You have the ICGR for your BHC. Using the year-end dollar amounts and your formula function calculate the growth in total assets for the most recent year-end and enter this in cell B93.

B. Write one paragraph interpreting the ICGRs and discussing your BHC’s most recent growth in assets and the potential for future growth.

 

CHAPTER 16: