Economics of Sustainability Management

ECONOMICS 1
Economics of Sustainability Management
Name of the student
Institutional affiliation
Course
Instructor’s name
City and state

ECONOMICS 2
SCEENARIO A:
Balance sheet at the beginning period
Bank A:
Bank A balance
sheet $ $
Assets
loans (cash) 99 99
equity and liabilities
capital 10
deposits 20
bonds 70 100
Bank B:
BANK B balance
sheet $ $
Assets
loan (cash) 80
equity and liabilities
capital 10
deposits 20
bonds 50 80
SCENARIO B: computing the actual CAR
Capital Adequacy Ratio (CAR) is a technique used by banks and other financial
institutions in measuring the level of capital expressed in terms of risk-weighted credit
exposure (Reserve Bank of New Zealand, 2007). The CAR is also used a measure of
protection to creditors, and promotion of sustainability of financial institutions. The formula
for calculating CAR is stated as: CAR = Tier 1 capital+Tier 2capital
Risk Weig h ted Assets . Alternatively however,
CAR can also be calculated as: (total capital)/weighted loan amounts.

ECONOMICS 3
CAR for bank A:
Therefore CAR =
Tier 1 capital+Tier 2capital
Risk Weig h ted Assets
= $(10/27)*100
CAR =0.37*100
= 37%
CAR for bank B:
BANK B
risk-weighted
exposures on the
balance sheet
amoun
t
risk
weighting
risk
weighted
exposure
s
exposure type
cash 80 0% 0
commercial loans 20 100% 20
5 year bond 50 10% 5
total 150 25
CAR = (10/25)*100
= 0.4*100
CAR = 40%
Profit for Both Banks
profit bank A Bank B amount
amount ($) $ $
Interest on loans
(4%) $80.0 $3.2 $99.0 $4.0
5-year bond (3.8%) $50.0 $1.9 $70.0 $2.7
Less: deposit rate
(3.5%) ($20.0)
($0.7
) $20.0 ($0.7)
risk-weighted
exposures on the
balance sheet BANK A:
exposure type
amoun
t
risk
weighting
risk
weighted
exposure
s
cash 99 0% 0
commercial loans 20 100% 20
5 year bond 70 10% 7
total 189 27