Right, in this workout we're being asked to calculate the total capital ratio for the two banks under Basel II, Basel II. And the banks we're looking at is Meji Bank, Inc. And Margot Credit Bank, Inc. Alright, let's start with Meji Bank, Inc. We have some assets here. Risk weighted assets for operational risk and risk weighted assets for market risk. They have been given to us. These two were new under the base two framework. So the first thing we got to calculate then is the risk weighted assets for the credit risk. Okay, so we look up all the assets that we have here, and we can see, we've been given the asset, as well as the risk weighting here. And we see that we have a commercial loan, Coca-Cola, for example, with only a 40% risk weighting, pretty low. So we're going to start with calculating the total risk weighted assets for credit risk. And I'm going to use these sum product function here. And I'm basically going to multiply all of these assets here, with all of these risk weightings here.

So we have the risk weighted assets for the credit risk. We have multiplied the risk weighting, times the asset amount for all these assets. And we've been given the risk weighted assets for operational risk and for market risk. Now then we get some equity data here, and we're going to calculate our total risk weighted assets, as well as our total capital. So our total risk weighted assets, most simple, is going to be our credit risk assets, plus our operational risk assets, plus our market risk assets, 7,289.4. In the next step, we're going to calculate total capital. So this is total capital, not tier one capital. We're going to start though with our tier one capital, which is going to be our common stock, plus our retained earnings, minus our goodwill. And then we're going to include our tier two capital, 100.

935 of total capital, tier one capital and tier two capital. And then we calculate the total capital to risk weighted assets. And 935 divided by our total risk weighted assets. And it's 12.8%. So 12.8% here, for Meji Bank, Inc. All right, let's do the same calculation. Let's look at Margot Credit Bank here. And they have cash mortgage loans, but they have those commercial loans to Venezuela Airlines. They got a loan to a board member of Margot Credit Bank, and they got a a loan to a secondhand car company in Brooklyn, right? We'd expect these to be riskier. Now, Basel II says that riskier loans need to have higher risk weighting. Let's have a look. And here are the risk weightings. Ah, and we can see that those loans to Venezuela Airlines and to the board member have way higher risk weightings than what we saw for Coca-Cola, and the other stable companies in Meji Bank. So first of all, we calculate the risk weighted assets for the credit risk, some product of all the assets, times the risk weighting, and we see the risk weighted assets for credit risk for Margo Bank is 6,721.2.

Margot Bank, of course, has some risk weight assets for operational risk, as well as for market risk. And again, these two items are new under the Basel II framework.

So we calculate our total risk weighted assets, that's going to be our credit risk weighted assets, plus our operational risk assets, plus our market risk, 7,221.2.

And then we go to our total capital, our common stock, plus retained earnings, minus goodwill, plus our tier two capital, 663. And what about the ratio here? The total capital, divided by the total risk weighted assets, 9.2. So let's take a step back, and we're seeing that Meji Bank has lower risk weighted assets, because they have less risky loans, and that creates a situation where their total capital to risk weighted assets is higher than for Margot Bank. And Margot Bank has all these risky loans with high risk weightings on them, creates a situation where Margot credit banking has a lower total capital to risk weighted assets than Meji Bank. So this highlights some of the new items in Basel II, different risk weighted assets for different risk and risk weighted assets to reflect operational risk and market risk.