Question 1

Under historical accounting methods for the market value of capital, FIs

Accepted Answer

A) must write down the value of their assets to fully reflect market values. 
B) have a great deal of discretion in timing the write downs of problem loans. 
C) must conform to regulatory write-down schedules. 
D) have an incentive to fully reflect problems in the asset portfolio as they become known. 
E) invest in expensive computerized bookkeeping systems. 
A) must write down the value of their assets to fully reflect market values. 
B) have a great deal of discretion in timing the write downs of problem loans. 
C) must conform to regulatory write-down schedules. 
D) have an incentive to fully reflect problems in the asset portfolio as they become known. 
E) invest in expensive computerized bookkeeping systems.

Question 2

Under Basel II (2006), operational risk can be measured by four different approaches.

Accepted Answer

A) True 
 B)False

Question 3

Under Basel II (2006), regulatory minimum capital requirements for credit, market, and operational risks are covered in the first pillar of the regulation.

Accepted Answer

A) True 
 B)False

Question 4

Operational risk has increased to a point that the Bank for International Settlements (BIS) requires DTIs to account for it in the capital adequacy standards under Basel II.

Accepted Answer

A) True 
 B)False

Question 5

Because rating agencies often lag rather than lead the business cycle, risk weights based on a loan's credit rating may not accurately measure the relative risk exposure of individual borrowers.

Accepted Answer

Risk weights based o

Question 6

Banks likely would need additional capital to meet the new minimum standards.

Accepted Answer

Impact on

Question 7

Under Basel III, Tier I capital measures the market value of common equity plus the amount of perpetual preferred stock plus minority equity interest held by the bank in subsidiaries minus goodwill.

Accepted Answer

A) True 
 B)False

Question 8

In calculating the net capital for a securities firms, which of the following is NOT an adjustment to the book value of net worth?

Accepted Answer

A) The market value of net worth is calculated on a day-to-day basis. 
B) A series of adjustments are made to reflect unrealized profits and losses, subordinated liabilities, deferred taxes, options, and futures. 
C) The amount of securities that cannot be publicly sold are subtracted. 
D) All assets not readily converted into cash are subtracted. 
E) Haircuts to reflect potential market value fluctuations in asset values are deducted. 
A) The market value of net worth is calculated on a day-to-day basis. 
B) A series of adjustments are made to reflect unrealized profits and losses, subordinated liabilities, deferred taxes, options, and futures. 
C) The amount of securities that cannot be publicly sold are subtracted. 
D) All assets not readily converted into cash are subtracted. 
E) Haircuts to reflect potential market value fluctuations in asset values are deducted.

Question 9

Under Basel III a deposit-taking institution's capital is divided into five categories.

Accepted Answer

A) True 
 B)False

Question 10

Bank regulators set minimum capital standards to

Accepted Answer

A) inhibit rapid growth rate of bank assets. 
B) protect shareholders from managerial fraud or incompetence. 
C) protect creditors from decreases in asset values. 
D) force banks to follow socially desirable policies. 
E) make work for regulators. 
A) inhibit rapid growth rate of bank assets. 
B) protect shareholders from managerial fraud or incompetence. 
C) protect creditors from decreases in asset values. 
D) force banks to follow socially desirable policies. 
E) make work for regulators.

Question 11

Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-20009.

Accepted Answer

A) True 
 B)False

Question 12

If the value of equity is less than zero on a mark-to-market accounting basis, liquidation of the FI would result in losses to the shareholders.

Accepted Answer

A) True 
 B)False

Question 13

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk, but not the interest rate or market risks.

Accepted Answer

A) True 
 B)False

Question 14

Book value accounting systems recognize the impact of interest rate problems sooner than credit risk problems.

Accepted Answer

A) True 
 B)False

Question 15

One function of capital is to provide funding for real assets, such as branches and technology that are necessary to provide financial services.

Accepted Answer

A) True 
 B)False

Question 16

Interest rate and liquidity risks are not yet included in the proposed Basel III plan.

Accepted Answer

The answer of Interest rate and liquidity risks are not...

Question 17

The determination of risk-adjusted on-balance-sheet assets under Basel III requires the segregation of assets into nine categories of credit risk exposure.

Accepted Answer

A) True 
 B)False

Question 18

Market value accounting is likely to increase the variability of earnings of an FI.

Accepted Answer

A) True 
 B)False

Question 19

Protecting FI insurance funds in the event of an FI failure is the responsibility of taxpayers.

Accepted Answer

A) True 
 B)False

Question 20

The book value of bonds and loans reflects the market value of those assets when they were placed on the books of an FI.

Accepted Answer

A) True 
 B)False

Exam 20: Capital Adequacy

Under historical accounting methods for the market value of capital, FIs

Under Basel II (2006), operational risk can be measured by four different approaches.

Under Basel II (2006), regulatory minimum capital requirements for credit, market, and operational risks are covered in the first pillar of the regulation.

Operational risk has increased to a point that the Bank for International Settlements (BIS) requires DTIs to account for it in the capital adequacy standards under Basel II.

Because rating agencies often lag rather than lead the business cycle, risk weights based on a loan's credit rating may not accurately measure the relative risk exposure of individual borrowers.

Banks likely would need additional capital to meet the new minimum standards.

Under Basel III, Tier I capital measures the market value of common equity plus the amount of perpetual preferred stock plus minority equity interest held by the bank in subsidiaries minus goodwill.

In calculating the net capital for a securities firms, which of the following is NOT an adjustment to the book value of net worth?

Under Basel III a deposit-taking institution's capital is divided into five categories.

Bank regulators set minimum capital standards to

Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-20009.

If the value of equity is less than zero on a mark-to-market accounting basis, liquidation of the FI would result in losses to the shareholders.

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk, but not the interest rate or market risks.

Book value accounting systems recognize the impact of interest rate problems sooner than credit risk problems.

One function of capital is to provide funding for real assets, such as branches and technology that are necessary to provide financial services.

Interest rate and liquidity risks are not yet included in the proposed Basel III plan.

The determination of risk-adjusted on-balance-sheet assets under Basel III requires the segregation of assets into nine categories of credit risk exposure.

Market value accounting is likely to increase the variability of earnings of an FI.

Protecting FI insurance funds in the event of an FI failure is the responsibility of taxpayers.

The book value of bonds and loans reflects the market value of those assets when they were placed on the books of an FI.

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

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