Exam 20: Capital Adequacy

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. Cash \ 80 Deposits \5 50 Municipal General Obligation \ 100 Bonds Residential Mortgages 1-4 \ 220 Long-Term Debt \2 90 family (LTV 60\%-80\%) Conmercial loans \ 500 Equity \6 0 Total Assets \ 900 \ 900 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 Is Fifth Bank currently over or under capitalized for on-balance-sheet assets in order to be considered well capitalized according to Basel III?

The Basic Indicator Approach in calculating capital to cover operational risk requires banks to hold 12 percent of total assets in capital to cover operational risk exposure.

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

The leverage ratio specified under FDICIA does not account for the risks of off-balance-sheet activities.

Under FDICIA,regulators are required to take prompt corrective action steps when a DI falls outside of Zone 1.

The measurement of credit risk under the Basel II Accord allows banks to choose between

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. Cash \ 80 Deposits \5 50 Municipal General Obligation \ 100 Bonds Residential Mortgages 1-4 \ 220 Long-Term Debt \2 90 family (LTV 60\%-80\%) Conmercial loans \ 500 Equity \6 0 Total Assets \ 900 \ 900 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 is the minimum Tier 1 and Total risk-based capital Fifth Bank needs in order to be considered adequately capitalized under Basel III capital requirements for both on-balance sheet and off-balance sheet items?

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. Cash \ 80 Deposits \5 50 Municipal General Obligation \ 100 Bonds Residential Mortgages 1-4 \ 220 Long-Term Debt \2 90 family (LTV 60\%-80\%) Conmercial loans \ 500 Equity \6 0 Total Assets \ 900 \ 900 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 is the amount of risk adjusted on-balance-sheet assets of the bank as defined under the Basel II standards?

The buffer proposed by Basel III that is designed to ensure that DIs build up a capital surplus outside of periods of financial distress is called the

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

Under market value accounting methods,FIs

A property-casualty (P-C)insurance firm has estimated the following risk-based capital charge for its individual risk classes: Risk R0 R1 R2 R3 R4 R5 R6 R7 Total Description AfflliatedP-C Fixed-income assets Common Stock Reinsurance Loss Adjustment Expense Written Premiums Humicane Earthquake RBC Charge \ 6.0 million \ 2.0 million \ 1.0 million \ 3.0 million \ 1.0 million \ 2.0 million \ 1.0 million \ 0.5 million \ 16.50 million Using the model recommended by the National Association of Insurance Commissioners (NAICs),what is the total risk-based capital charge for the P-C firm?

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

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

Under Basel III,Globally Systematically Important Banks (G-SIBs)were identified by the Bank for International Settlements (BISs)by all of the following indicators except

Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-2009.

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

Counterparty credit risk is more prevalent for exchange-traded derivatives than over-the-counter (OTC)contracts because the bank has more control of its OTC contracts.

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