Exam 20: Capital Adequacy

The risk-adjusted asset values of OBS market contracts or derivative instruments are determined in a manner similar to the risk-adjusted asset values of contingent guarantee claims.

Equity holders absorb credit losses on the asset portfolio because liability holders are junior claimants.

Which of the following is not a category of capital under Basel III?

Under International Financial Reporting Standards, FIs have flexible rules in recognizing the amount and timing of loan losses.

The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.

The Basel capital requirements are based upon the premise that

More frequent regulatory examinations and stricter regulator standards will cause greater discrepancies in book value of equity and the market value of equity.

The primary difference between Basel I and the proposed Basel III in calculating risk-adjusted assets is

In addition to establishing minimum capital requirements, Basel II proposed procedures to ensure that sound internal process are used to assess capital adequacy and to set targets that are commensurate with the risk profile and environment.

The benefits may not support the significant cost of developing and implementing new risk management systems.

Basel I (1993) requires banks in the member countries of the Bank for International Settlements to utilize risk-based capital ratios.

A criticism of the Basel I risk-based capital ratio is

The risk-based capital ratio does account for loans made to companies with different credit ratings.

The risk-based capital ratio fails to take into account the effects of diversification in the credit portfolio.

When a substandard loan is identified by a regulator, it is required that the loan immediately be charged off by the bank.

Which of the following assets is deducted from Common Equity Tier I capital?

Under Basel III, banks are allowed to use their internal estimates of borrower creditworthiness to assess credit risk subject to strict disclosure standards.

Because DTIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.

Basel III guidelines for determining credit risk-adjusted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

Except in cases of extreme credit risk shocks or interest rate risk shocks, the book value of equity is equal to the economic or market value of equity.