Question 4: Part a) Describe the Basel III capital conservation buffer. What is the minimum Tier 1 equity capital ratio, including capital conservation and countercyclical buffers, that allows unrestricted dividend distributions?

Question 4:

Part a) Describe the Basel III capital conservation buffer. What is the minimum Tier 1 equity capital ratio, including capital conservation and countercyclical buffers, that allows unrestricted dividend distributions? (4 marks)

Part b) Calculate the minimum Basel I capital requirement for Commonwealth Bank of the following three transactions with a B-rated mining company. (6 marks)

  1. A 6-year equity option with notional principal of $35 million that is worth -$1.5 million (i.e. Commonwealth is out-of-the-money).
  2. A 59-month interest rate swap with notional principal of $90 million that is worth $3.25 million (i.e. Commonwealth Bank is in-the-money).
  3. An over-the-counter 5-year Platinum derivatives contract with notional principal of $250 million that is currently worth $1.5 million (i.e. Commonwealth Bank is in-the-money).

What is the minimum capital requirement for these 3 transactions using Basel II risk weights for the mining company?

Part c) Mesa Verde Bank (MVB) has the following Balance Sheet. Calculate the Net Stable Funding Ratio (NSFR) for MVB, does this meet current regulatory requirements? If MVB raise Retail Deposits (stable) to fund Residential mortgages, how many additional Retail Deposits (stable) do they need to achieve a NSFR of 100%? (10 marks)

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