Question 1

A life insurance company that is a parent company is not required to hold an equivalent amount of risk-based capital to protect against financial downturns of affiliates.

Accepted Answer

A) True 
 B)False

Question 2

Under Basel III,OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-adjusted asset values.

Accepted Answer

A) True 
 B)False

Question 3

The risk-based capital model in the life insurance industry includes asset risk,business risk,insurance risk,and interest rate risk.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Fifth Bank has the following balance sheet with values stated in millions of dollars.All assets are associated with corporate customers (not governments or sovereigns).Refer to Table 20-8 for associated risk weights. $\begin{array}{ll}
\text { Cash } & \$ 80& \text { Deposits } &\$550\
\text { Municipal General Obligation } & \$ 100 \
\text { Bonds } & \
\text { Residential Mortgages 1-4 } & \$ 220& \text { Long-Term Debt }&\$290 \
\text { family (LTV 60\%-80\%) } & \
\text { Conmercial loans } & \$ 500&\text { Equity } & \$60  \
\text { Total Assets } & \$ 900&&\$ 900
\end{array}$ In addition,Fifth Bank has off-balance sheet items as follows: (Refer to Tables 20-10 and 20-11)
$50 million in commercial letters of credit (LCs),
$300 million in 3-year interest rate swaps that are in-the-money by $2 million
$50 million in 4-year forward FX contracts that are out-of-the money by $2 million
What are,respectively,the credit equivalent value of the letters of credit,interest rate swaps,and FX contracts?

Accepted Answer

A) $10.0 million;$3.5 million;$5.0 million. 
B) $50.0 million;$300 million;$50.0 million. 
C) $5.0 million;$1.5 million;$5.0 million. 
D) $10.0 million;$1.5 million;$5.0 million. 
A) $10.0 million;$3.5 million;$5.0 million. 
B) $50.0 million;$300 million;$50.0 million. 
C) $5.0 million;$1.5 million;$5.0 million. 
D) $10.0 million;$1.5 million;$5.0 million.

Question 6

In the NAIC model for life insurance companies,which risk captures the risk of adverse changes in mortality risk and morbidity risk?

Accepted Answer

A) Interest rate risk. 
B) Business risk. 
C) Asset risk. 
D) Foreign exchange risk. 
E) Insurance risk. 
A) Interest rate risk. 
B) Business risk. 
C) Asset risk. 
D) Foreign exchange risk. 
E) Insurance risk.

Question 7

The calculation of the risk-adjusted asset values of OBS market contracts

Accepted Answer

A) nearly always equals zero because the exchange over which the contract initially traded assumes all of the risk. 
B) requires multiplication of the credit equivalent amounts by the appropriate risk weights. 
C) requires the calculation of a conversion factor to create credit equivalent amounts. 
D) All of the options. 
E) requires multiplication of the credit equivalent amounts by the appropriate risk weights and the calculation of a conversion factor to create credit equivalent amounts. 
A) nearly always equals zero because the exchange over which the contract initially traded assumes all of the risk. 
B) requires multiplication of the credit equivalent amounts by the appropriate risk weights. 
C) requires the calculation of a conversion factor to create credit equivalent amounts. 
D) All of the options. 
E) requires multiplication of the credit equivalent amounts by the appropriate risk weights and the calculation of a conversion factor to create credit equivalent amounts.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

In the NAIC model for life insurance companies,which risk covers the amount of capital necessary to meet the maximum contribution that an insurance company may need to make to the state guarantee fund?

Accepted Answer

A) Interest rate risk. 
B) Business risk. 
C) Asset risk. 
D) Foreign exchange risk. 
A) Interest rate risk. 
B) Business risk. 
C) Asset risk. 
D) Foreign exchange risk.

Question 10

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

Question 11

The FASB set its guidelines to allow for the valuation of assets to be based on

Accepted Answer

A) prices at the discretion of the DI's management. 
B) book values rather than market values. 
C) market values that existed when the assets were last marked to market. 
D) prices that would be received as part of a forced liquidation. 
E) prices that would be received in an orderly market. 
A) prices at the discretion of the DI's management. 
B) book values rather than market values. 
C) market values that existed when the assets were last marked to market. 
D) prices that would be received as part of a forced liquidation. 
E) prices that would be received in an orderly market.

Question 12

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. 
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.

Question 13

Under Generally Accepted Accounting Principles,FIs have flexible rules in recognizing the amount and timing of loan losses.

Accepted Answer

A) True 
 B)False

Question 14

$\begin{array}{lccc}
  \text { Securities (at par) } & \text { \$ 250  Deposits}& \$975  \
 \text { Loans (at par)} &    \text {  \$ 760  Capital} & \$ 35
\end{array}$
 Given that 25 percent of the loans have been identified as problem loans,and if historical cost accounting methods allow the bank to write down only 10 percent of the problem loans,what will be the book value of capital?

Accepted Answer

A) $35 million. 
B) -$155 million. 
C) $16 million. 
D) -$7 million. 
A) $35 million. 
B) -$155 million. 
C) $16 million. 
D) -$7 million.

Question 15

The Basel capital requirements are based upon the premise that

Accepted Answer

A) banks with riskier assets should have higher capital ratios. 
B) banks with riskier assets should have lower capital ratios. 
C) banks with riskier assets should have lower absolute amounts of capital. 
D) banks with riskier assets should have higher absolute amounts of capital. 
A) banks with riskier assets should have higher capital ratios. 
B) banks with riskier assets should have lower capital ratios. 
C) banks with riskier assets should have lower absolute amounts of capital. 
D) banks with riskier assets should have higher absolute amounts of capital.

Question 16

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

Question 17

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 the options. 
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 the options.

Question 18

Similar to Basel II,Basel III will require banks to assign on-balance-sheet assets to one of four categories of credit risk exposure.

Accepted Answer

A) True 
 B)False

Question 19

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 20

Which approach used in calculating capital to cover operational risk allow banks to rely on internal data for the calculation of regulatory capital requirements?

Accepted Answer

A) Standardized approach. 
B) Advanced measurement approach. 
C) Basic indicator approach. 
D) Internal ratings-based approach. 
A) Standardized approach. 
B) Advanced measurement approach. 
C) Basic indicator approach. 
D) Internal ratings-based approach.

Exam 20: Capital Adequacy

A life insurance company that is a parent company is not required to hold an equivalent amount of risk-based capital to protect against financial downturns of affiliates.

Under Basel III,OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-adjusted asset values.

The risk-based capital model in the life insurance industry includes asset risk,business risk,insurance risk,and interest rate risk.

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

In the NAIC model for life insurance companies,which risk captures the risk of adverse changes in mortality risk and morbidity risk?

The calculation of the risk-adjusted asset values of OBS market contracts

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

In the NAIC model for life insurance companies,which risk covers the amount of capital necessary to meet the maximum contribution that an insurance company may need to make to the state guarantee fund?

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

The FASB set its guidelines to allow for the valuation of assets to be based on

Bank regulators set minimum capital standards to

Under Generally Accepted Accounting Principles,FIs have flexible rules in recognizing the amount and timing of loan losses.

Securities (at par) \ 250 Deposits \9 75 Loans (at par) \ 760 Capital \ 35 Given that 25 percent of the loans have been identified as problem loans,and if historical cost accounting methods allow the bank to write down only 10 percent of the problem loans,what will be the book value of capital?

The Basel capital requirements are based upon the premise that

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

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

Similar to Basel II,Basel III will require banks to assign on-balance-sheet assets to one of four categories of credit risk exposure.

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

Which approach used in calculating capital to cover operational risk allow banks to rely on internal data for the calculation of regulatory capital requirements?

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