Right. In this workup, we're being asked to calculate the total capital ratio and the return on equity for the following two banks and comment on the results. There's lots of information here but we got Meji Bank here on the left. Let's look through the loan book of Meji Bank.

It's got some cash, some accounts payable, some mortgage loans, and it's got a loan to Coca-Cola. Sounds like a safe business, right? It's got a loan to Google, and it's got a a mortgage or a loan to Facebook. Very kind of a blue chip type of players here that they have lent to. And then we look at Margot Bank. Cash, yes, accounts payable, mortgage loans, but it also has a commercial loan to Venezuela Airlines. Oh, that sounds risky. It's got a commercial loan to Margot Credit Bank, a board member. Oh, that sounds risky too. And a commercial loan to the Second Hand Car Company of Brooklyn. Wow. It looks like these banks are slightly different. Margot Bank looks pretty risky, while the Meji Bank here on the left looks pretty safe. Well, and we go down, and we have some of the equity positions there and the net income. Now, first of all, the risk weighted assets have already been calculated for us. And because Basel-1 is so crude, the risk weighting methodology between Meji Bank and Margot Bank are the same. So that's how we have arrived at our risk weighting here for Meji Bank and Margot Bank. Same risk weighting for all those commercial loans. Well, you can probably see where this is going, but let's get the exercise finished first. Right, first thing we're gonna calculate is tier one capital for Meji Bank. That's gonna be my common stock for Meji Bank as well as my retained earnings, and remove the Goodwill position from Meji Bank. So Meji Bank, tier one capital, 835. What about Margot Credit Bank? Well, we go up, we pick up our common stock for our retained earnings, 789, remove our Goodwill, and we get a tier one capital position of 463.

We're adding the tier two capital for Meji Bank, 100, and for Margot Bank, 200. And that way we also have our total capital position for the two banks.

So our total capital ratio, 935 for Meji Bank, divided by the risk weighted assets, 9.7%. And for Margot Credit Bank, 9.8%. So from this point of view, it looks like Meji Bank is slightly less capitalized than Margot Bank. Let's have a look at the return on equity for these two banks. Well, the return on equity is going to be our net income divided by our equity position. And the equity position here is our common stock and our retained earnings.

And that's 9.7% as well for Meji Bank. And what about Margot Bank? Well, we have the net income there of a hundred, and we're gonna divide that by our common stock and our retained earnings.

And there we can see that Margot Credit Bank Inc has a much higher return on equity. So from a Basel-1 perspective, it actually looks like Meji Bank is slightly worse capitalized, and Margot Bank has a higher return on equity. Well, the reason of course, for this discrepancy here is that Margot Bank is actually lending to much riskier businesses here. But Basel-2 regulations did not take that into account. So this shows a serious weakness of Basel-1 regulation. Shouldn't be a surprise really, if you think about it logically, that Margot Bank is generating higher return on equity. It's making a lot riskier loans and can therefore expect a higher interest on those loans.