Question 1

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) Aggregate indebtedness 
B) Unrealized profits 
C) An adjustment for certain tax provisions 
D) Deferred tax provisions 
A) Aggregate indebtedness 
B) Unrealized profits 
C) An adjustment for certain tax provisions 
D) Deferred tax provisions A

Question 2

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  False

Question 3

A property-casualty (P-C)insurance firm has estimated the following risk-based capital charge for its individual risk classes: $\begin{array}{l}
\begin{array}{lll}
Risk\
R0 \
R 1 \
R 2 \
R3\
R4\
R5\
R6\
R7\
Total
\end{array}
\begin{array}{l}
\text {Description}\
\text { AfflliatedP-C } \
\text { Fixed-income assets } \
\text { Common Stock } \
\text { Reinsurance } \
\text { Loss Adjustment Expense } \
\text { Written Premiums } \
\text { Humicane } \
\text { Earthquake }\
\
\end{array}
\begin{array}{l}
\text {RBC Charge}\
\$ 6.0 \text { million } \
\$ 2.0 \text { million } \
\$ 1.0 \text { million } \
\$ 3.0 \text { million } \
\$ 1.0 \text { million } \
\$ 2.0 \text { million } \
\$ 1.0 \text { million } \
\$ 0.5 \text { million }\
\$ 16.50 \text { million }\
\end{array}
\end{array}$

Is the firm adequately capitalized if it has total capital and surplus of $10 million?

Accepted Answer

A) No,its total risk-based capital charge is higher than $10 million. 
B) No,its total risk-based capital charge is lower than $10 million. 
C) Yes,its total risk-based capital charge is higher than $10 million. 
D) Yes,its total risk-based capital charge is lower than $10 million. 
A) No,its total risk-based capital charge is higher than $10 million. 
B) No,its total risk-based capital charge is lower than $10 million. 
C) Yes,its total risk-based capital charge is higher than $10 million. 
D) Yes,its total risk-based capital charge is lower than $10 million. C

Question 4

What is the impact on economic capital of a 25 basis point decrease in interest rates if the FI is holding a 20-year,fixed-rate,11 percent annual coupon bond selling at a par value of $100,000?

Accepted Answer

A) A decrease of $250. 
B) An increase of $250. 
C) An increase of $2,024. 
D) A decrease of $1,959. 
A) A decrease of $250. 
B) An increase of $250. 
C) An increase of $2,024. 
D) A decrease of $1,959.

Question 5

Under FDICIA,the ability for regulators to show forbearance is limited by a set of mandatory actions for each level of capital that an FI achieved.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

$\begin{array}{lccc}
  \text { Securities (at par) } & \text { \$ 250  Deposits}& \$975  \
 \text { Loans (at par)} &    \text {  \$ 760  Capital} & \$ 35
\end{array}$
 If the loan portfolio consists of five-year,10 percent annual coupon par value loans,what is the market,or economic,value of capital if interest rates decrease 2 percent?

Accepted Answer

A) $35 million. 
B) $96 million. 
C) $60 million. 
D) -$7 million. 
A) $35 million. 
B) $96 million. 
C) $60 million. 
D) -$7 million.

Question 8

Under Basel III,the credit risk-adjusted value of the bank's on-balance-sheet assets can be found by adding the products of the risk weights for each asset times the market value of each asset.

Accepted Answer

A) True 
 B)False

Question 9

Operational risk increased to a point that the Bank for International Settlements (BISs)required DIs to account for the risk in the capital adequacy standards under Basel II.

Accepted Answer

A) True 
 B)False

Question 10

The capital requirements for broker-dealers include a net worth market value to assets ratio of at least 2 percent.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

$\begin{array}{lccc}
  \text { Securities (at par) } & \text { \$ 250  Deposits}& \$975  \
 \text { Loans (at par)} &    \text {  \$ 760  Capital} & \$ 35
\end{array}$
 If the loan portfolio consists of a five-year,10 percent annual coupon loan selling at par,what is the market,or economic,value of capital if interest rates increase 1 percent?

Accepted Answer

A) $35 million. 
B) -$155 million. 
C) $7 million. 
D) -$7 million. 
A) $35 million. 
B) -$155 million. 
C) $7 million. 
D) -$7 million.

Question 15

Under Basel II (2006),total capital is equal to Tier I capital plus Tier II capital.

Accepted Answer

A) True 
 B)False

Question 16

If an FI were closed by regulators before its economic net worth became zero,neither liability holders nor those regulators guaranteeing the claims of liability holders would stand to lose.

Accepted Answer

A) True 
 B)False

Question 17

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. 
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.

Question 18

How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)?

Accepted Answer

A) 12. 
B) 18. 
C) 30. 
D) 36. 
A) 12. 
B) 18. 
C) 30. 
D) 36.

Question 19

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 20

Through August 2015,which of the following approximates the amount of dividends and assessments that the U.S.Treasury has received from entities participating in the TARP Capital Purchase Program?

Accepted Answer

A) $20.1 billion. 
B) $1.2 billion. 
C) $34.6 billion. 
D) $16.0 billion. 
A) $20.1 billion. 
B) $1.2 billion. 
C) $34.6 billion. 
D) $16.0 billion.

Exam 20: Capital Adequacy

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

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.

What is the impact on economic capital of a 25 basis point decrease in interest rates if the FI is holding a 20-year,fixed-rate,11 percent annual coupon bond selling at a par value of $100,000?

Under FDICIA,the ability for regulators to show forbearance is limited by a set of mandatory actions for each level of capital that an FI achieved.

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

Securities (at par) \ 250 Deposits \9 75 Loans (at par) \ 760 Capital \ 35 If the loan portfolio consists of five-year,10 percent annual coupon par value loans,what is the market,or economic,value of capital if interest rates decrease 2 percent?

Under Basel III,the credit risk-adjusted value of the bank's on-balance-sheet assets can be found by adding the products of the risk weights for each asset times the market value of each asset.

Operational risk increased to a point that the Bank for International Settlements (BISs)required DIs to account for the risk in the capital adequacy standards under Basel II.

The capital requirements for broker-dealers include a net worth market value to assets ratio of at least 2 percent.

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

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

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

Securities (at par) \ 250 Deposits \9 75 Loans (at par) \ 760 Capital \ 35 If the loan portfolio consists of a five-year,10 percent annual coupon loan selling at par,what is the market,or economic,value of capital if interest rates increase 1 percent?

Under Basel II (2006),total capital is equal to Tier I capital plus Tier II capital.

If an FI were closed by regulators before its economic net worth became zero,neither liability holders nor those regulators guaranteeing the claims of liability holders would stand to lose.

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

How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)?

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.

Through August 2015,which of the following approximates the amount of dividends and assessments that the U.S.Treasury has received from entities participating in the TARP Capital Purchase Program?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

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

Filters