Question 1

Counter party credit risk in OBS contracts

Accepted Answer

A) is the risk that the counterparty will likely default when he is in the money on a contract position. 
B) refers to the risk that a counterparty will default when suffering large actual or potential losses on its position. 
C) requires the counterparty to return to the market and replace contracts at less favorable terms. 
D) All of these. 
E) None of these. 
A) is the risk that the counterparty will likely default when he is in the money on a contract position. 
B) refers to the risk that a counterparty will default when suffering large actual or potential losses on its position. 
C) requires the counterparty to return to the market and replace contracts at less favorable terms. 
D) All of these. 
E) None of these.

Question 2

The primary difference between Basel I and the proposed Basel III in converting OBS values to on-balance-sheet credit equivalent amounts is

Accepted Answer

A) the use of credit ratings in Basel III to assign credit risk weights on the OBS activities. 
B) the use of six weight classes by Basel III rather than four classes. 
C) the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities. 
D) All of these. 
E) the use of credit ratings in Basel III to assign credit risk weights on the OBS activities, and the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities. 
A) the use of credit ratings in Basel III to assign credit risk weights on the OBS activities. 
B) the use of six weight classes by Basel III rather than four classes. 
C) the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities. 
D) All of these. 
E) the use of credit ratings in Basel III to assign credit risk weights on the OBS activities, and the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities.

Question 3

The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders.

Accepted Answer

A) True 
 B)False

Question 4

The current exposure component of the credit equivalent amount of OBS derivative items reflects

Accepted Answer

A) the probability of an adverse price movement in contracts. 
B) the cost of replacing a contract if a counterparty defaults today. 
C) the probability today of a counterparty contract default in the future. 
D) the maximum price loss for any given position. 
E) future volatility of the underlying. 
A) the probability of an adverse price movement in contracts. 
B) the cost of replacing a contract if a counterparty defaults today. 
C) the probability today of a counterparty contract default in the future. 
D) the maximum price loss for any given position. 
E) future volatility of the underlying.

Question 5

Which of the following is not included in the Common Equity Tier I capital under Basel III?

Accepted Answer

A) Retained earnings. 
B) Par value of common shares issued by the bank. 
C) Par value of noncumulative perpetual preferred stock. 
D) Paid-in excess (surplus) of common stock. 
E) Common shares issued by consolidated subsidiaries of the bank. 
A) Retained earnings. 
B) Par value of common shares issued by the bank. 
C) Par value of noncumulative perpetual preferred stock. 
D) Paid-in excess (surplus) of common stock. 
E) Common shares issued by consolidated subsidiaries of the bank.

Question 6

Calculation of the "add-on" to the risk-based capital ratio to measure operational risk

Accepted Answer

A) may be done using the Basic Indicator Approach. 
B) may be done using the Standardized Approach. 
C) may be done using the Advanced Measurement Approach. 
D) All of these. 
E) may be done using the Basic Indicator Approach and may be be done using the Standardized Approach. 
A) may be done using the Basic Indicator Approach. 
B) may be done using the Standardized Approach. 
C) may be done using the Advanced Measurement Approach. 
D) All of these. 
E) may be done using the Basic Indicator Approach and may be be done using the Standardized Approach.

Question 7

Under market value accounting methods, 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 problem assets as they become known. 
E) are required to 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 problem assets as they become known. 
E) are required to invest in expensive computerized bookkeeping systems.

Question 8

Market value accounting often is criticized because the error in market valuation of nontraded assets likely will be greater than the error using the original book valuation.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The purpose of the countercyclical buffer proposed by Basel III is to

Accepted Answer

A) expose those banks with inadequate capital to survive economic downturns. 
B) assist insolvent banks build capital during economic expansions. 
C) protect the banking system and reduce systematic exposures to economic downturns. 
D) enhance global movement of funds to those countries experiencing excess aggregate credit growth. 
E) force DTIs to immediately adjust capital to meet the 2.5 percent level of buffer capital required. 
A) expose those banks with inadequate capital to survive economic downturns. 
B) assist insolvent banks build capital during economic expansions. 
C) protect the banking system and reduce systematic exposures to economic downturns. 
D) enhance global movement of funds to those countries experiencing excess aggregate credit growth. 
E) force DTIs to immediately adjust capital to meet the 2.5 percent level of buffer capital required.

Question 11

The difference between the market value of assets and liabilities is the definition of the

Accepted Answer

A) accounting value of capital. 
B) regulatory value of capital. 
C) economic value of capital. 
D) book value of net worth. 
E) adjusted book value of net worth. 
A) accounting value of capital. 
B) regulatory value of capital. 
C) economic value of capital. 
D) book value of net worth. 
E) adjusted book value of net worth.

Question 12

The use of risk-based capital measures under Basel I (1993) effectively mark-to-market the bank's on- and off-balance-sheet for the purpose of reflecting credit and market risk.

Accepted Answer

A) True 
 B)False

Question 13

Regulatory-defined capital and required leverage ratios are based in whole or in part on

Accepted Answer

A) market value accounting concepts. 
B) book value accounting concepts. 
C) the net worth concept. 
D) the economic meaning of capital. 
E) None of these. 
A) market value accounting concepts. 
B) book value accounting concepts. 
C) the net worth concept. 
D) the economic meaning of capital. 
E) None of these.

Question 14

Capital is the primary protection for an FI against the risk of insolvency and failure.

Accepted Answer

A) True 
 B)False

Question 15

The evaluation of credit risk of off-balance-sheet (OBS) assets under Basel III requires that the notional amount of OBS items be converted to credit equivalent amounts of on-balance-sheet items.

Accepted Answer

A) True 
 B)False

Question 16

The function of capital to serve as a source of funds is critical to regulators in setting risk-based deposit insurance premiums.

Accepted Answer

A) True 
 B)False

Question 17

The Standardized Approach in calculating capital to cover operational risk requires DTIs to separate activities into business units from which a capital charge is determined based on the amount of operational risk in each unit.

Accepted Answer

A) True 
 B)False

Question 18

Market value of equity is more appropriate than book value of equity at reflecting changes in the credit risk and interest rate risk of an FI.

Accepted Answer

A) True 
 B)False

Question 19

Calculation of the "add-on" to the risk-based capital ratio to measure market risk

Accepted Answer

A) may be done using the Basic Indicator Approach. 
B) may be done using the standardized model proposed by regulators. 
C) may be done using the DI's own internal market risk model. 
D) may be done using either the Basic Indicator Approach or the standardized model proposed by regulators. 
E) may be done using the standardized model proposed by regulators, and may be done using the DI's own internal market risk model. 
A) may be done using the Basic Indicator Approach. 
B) may be done using the standardized model proposed by regulators. 
C) may be done using the DI's own internal market risk model. 
D) may be done using either the Basic Indicator Approach or the standardized model proposed by regulators. 
E) may be done using the standardized model proposed by regulators, and may be done using the DI's own internal market risk model.

Question 20

An FI may be insolvent in market value terms even if the book value of equity is positive.

Accepted Answer

A) True 
 B)False

Exam 20: Capital Adequacy

Counter party credit risk in OBS contracts

The primary difference between Basel I and the proposed Basel III in converting OBS values to on-balance-sheet credit equivalent amounts is

The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders.

The current exposure component of the credit equivalent amount of OBS derivative items reflects

Which of the following is not included in the Common Equity Tier I capital under Basel III?

Calculation of the "add-on" to the risk-based capital ratio to measure operational risk

Under market value accounting methods, FIs

Market value accounting often is criticized because the error in market valuation of nontraded assets likely will be greater than the error using the original book valuation.

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

The purpose of the countercyclical buffer proposed by Basel III is to

The difference between the market value of assets and liabilities is the definition of the

The use of risk-based capital measures under Basel I (1993) effectively mark-to-market the bank's on- and off-balance-sheet for the purpose of reflecting credit and market risk.

Regulatory-defined capital and required leverage ratios are based in whole or in part on

Capital is the primary protection for an FI against the risk of insolvency and failure.

The evaluation of credit risk of off-balance-sheet (OBS) assets under Basel III requires that the notional amount of OBS items be converted to credit equivalent amounts of on-balance-sheet items.

The function of capital to serve as a source of funds is critical to regulators in setting risk-based deposit insurance premiums.

The Standardized Approach in calculating capital to cover operational risk requires DTIs to separate activities into business units from which a capital charge is determined based on the amount of operational risk in each unit.

Market value of equity is more appropriate than book value of equity at reflecting changes in the credit risk and interest rate risk of an FI.

Calculation of the "add-on" to the risk-based capital ratio to measure market risk

An FI may be insolvent in market value terms even if the book value of equity is positive.

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