1. Explain Basel III in detail. Go to Investopedia and read, for example, “What is Basel III” by Margaret James, July 11, 2020, and “Understanding the Basel III International Regulations” by Brian Perry June 27, 2019. What is the likely impact on the financial system and economic growth?
2. Both capital adequacy and liquidity are important when evaluating a bank’s overall risk exposure. This problem focuses on both. Go to the FDIC site and obtain data for Wells Fargo and $250B-plus assets commercial bank peer group. Look up the following ratios for WF and $250B-plus banks for each of the following years ended December 31: 2020, 2012, 2008 and 2000:
a. Leverage (core capital) (row 31), Tier 1 risk-based capital (row 34), and Total risk-based capital (row 35) ratios in Performance and Condition Ratios;
b. Cash and due from depository institutions (row 4) in Assets and Liabilities (% of assets.)
Place your findings into an Excel spreadsheet table. Discuss your findings. How have the capital ratios changed over time? How has cash holdings changed? How does Wells Fargo compare with peer group?
3. A 5-year ARM (5/1 ARM) is a loan with a fixed rate for the first 5 years and a rate that subsequently changes once a year for its remaining life. Your lender locks in your rate for the first 5 years, but thereafter it changes on an annual basis moving up or down in conjunction with a specific interest-rate index, such as LIBOR. That said, suppose you’re analyzing a 5/1 ARM with a 30-year initial amortization period. The ARM is quoted at a 2.4% APR. You obtain an $800,000 adjustable rate loan.
a. Calculate your monthly payments for the first 5 years.
b. Determine the balance of principal due on the loan after 5 years or the 60th payment.
c. After 5 years the APR on your loan advances to 4.8% due to higher inflation. Calculate your new monthly payments beginning in month 61.
d. Recalculate your results to parts a, b and c assuming the 5/1 ARM is an interest-only ARM for the first five years and will be fully amortized over the final 25 years.
4. Read an overview of CAMELS bank ratings in Chapter 16 (also, the Chapter 16 Summary). Then go to the Federal Reserve Bank of San Francisco (FRBSF) and study the June 11, 1999 Economic Letter “Using CAMELS Ratings to Monitor Bank Conditions,” by Jose A. Lopez. Explain CAMELS ratings and what the three major Federal regulatory agencies (Federal Reserve, OCC and FDIC) do to monitor the six major risks facing banks? Are CAMELS ratings worthwhile?
