$\begin{array}{lccc} \text {Cash and Treasury securities}& \text { \$ 100 million}\\ \text { FedFunds Sold }& \text { \$ 100 million}\\ \text { Resiclential Mortgages 1-4 family}& \text { \$ 200 million}\\ \text {Commercial Loans }& \text { \$ 600 million}\\ \end{array}$ Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. What is the ratio of capital to risk-adjusted assets,if the bank has capital of $50 million?

A) 5.00 percent. B) 5.56 percent. C) 6.94 percent. D) 8.33 percent. E) 6.25 percent. A) 5.00 percent. B) 5.56 percent. C) 6.94 percent. D) 8.33 percent. E) 6.25 percent.

$\begin{array}{lccc} \text { Securities (at par) } & \text { \$ 250 Deposits}& \$975 \\ \text { Loans (at par)} & \text { \$ 760 Capital} & \$ 35 \end{array}$ If problem loans reduce the market value of the loan portfolio by 25 percent,what is the value of regulatory defined (book value)capital?

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

$\begin{array}{lccc} \text {Cash and Treasury securities}& \text { \$ 100 million}\\ \text { FedFunds Sold }& \text { \$ 100 million}\\ \text { Resiclential Mortgages 1-4 family}& \text { \$ 200 million}\\ \text {Commercial Loans }& \text { \$ 600 million}\\ \end{array}$ Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. What is the amount of risk-adjusted assets?

A) $1,000 million. B) $720 million. C) $900 million. D) $600 million. A) $1,000 million. B) $720 million. C) $900 million. D) $600 million.

Exam 20: Capital Adequacy

Cash and Treasury securities \ 100 million FedFunds Sold \ 100 million Resiclential Mortgages 1-4 family \ 200 million Commercial Loans \ 600 million Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. What is the ratio of capital to risk-adjusted assets,if the bank has capital of $50 million?

(Multiple Choice)

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Question 81

Which of the following assets is deducted from Common Equity Tier I capital?

(Multiple Choice)

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Question 82

The risk-based capital requirements have received several types of criticism.Please match the criticism headings below (as stated in the text)with the appropriate criticism.

The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.

DI specialness

Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.

Pillar 2 may ask too much of regulators

The benefits may not support the significant cost of developing and implementing new risk management systems.

Risk weights based on external credit ratinc agencies

Correct Answer:

Verified

The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.

Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.

The benefits may not support the significant cost of developing and implementing new risk management systems.

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

The BIS plans largely ignore the covariance among asset risks between different parties.

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.

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

Because of different tax, accounting, and safety-net rules and the application of the new Basel III rules to different industries, a level playing field across banks in different countries will not occur.

Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment.

(Matching)

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Question 83

As compared to Basel I,the standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DIs are facing.

(True/False)

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(79)

Question 84

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.

(True/False)

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(85)

Question 85

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

(Multiple Choice)

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(85)

Question 86

In the property-casualty insurance model,risk-based capital is a function of six different risk categories.

(True/False)

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Question 87

One function of bank capital is to protect uninsured depositors,bondholders,and creditors in the event of insolvency and liquidation.

(True/False)

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Question 88

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

(True/False)

4.8/5

(78)

Question 89

The Basel II Accord effective at year-end 2007 in the United States

(Multiple Choice)

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Question 90

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.

(True/False)

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(71)

Question 91

The economic definition of the value of an FI's equity is the book value of assets minus the market value of liabilities.

(True/False)

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Question 92

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.

(True/False)

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(79)

Question 93

Broker-dealers make very few adjustments to the book value net worth to reach an approximate market value net worth.

(True/False)

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Question 94

Market value accounting often is said to be difficult to implement because of the amount of assets that are not actively traded.

(True/False)

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(68)

Question 95

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

(Multiple Choice)

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(83)

Question 96

Securities (at par) \ 250 Deposits \9 75 Loans (at par) \ 760 Capital \ 35 If problem loans reduce the market value of the loan portfolio by 25 percent,what is the value of regulatory defined (book value)capital?

(Multiple Choice)

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Question 97

FDICIA required that banks and thrifts adopt the same capital requirements.

(True/False)

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Question 98

The implementation of true market value accounting for FIs may have adverse effects on small business finance and economic growth because of the hesitancy of FIs to invest in long-term assets.

(True/False)

4.7/5

(98)

Question 99

Cash and Treasury securities \ 100 million FedFunds Sold \ 100 million Resiclential Mortgages 1-4 family \ 200 million Commercial Loans \ 600 million Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. What is the amount of risk-adjusted assets?

(Multiple Choice)

4.8/5

(85)

Question 100

Exam 20: Capital Adequacy

Which of the following assets is deducted from Common Equity Tier I capital?

As compared to Basel I,the standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DIs are facing.

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

In the property-casualty insurance model,risk-based capital is a function of six different risk categories.

One function of bank capital is to protect uninsured depositors,bondholders,and creditors in the event of insolvency and liquidation.

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

The Basel II Accord effective at year-end 2007 in the United States

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 economic definition of the value of an FI's equity is the book value of assets minus the market value of liabilities.

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.

Broker-dealers make very few adjustments to the book value net worth to reach an approximate market value net worth.

Market value accounting often is said to be difficult to implement because of the amount of assets that are not actively traded.

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

Securities (at par) \ 250 Deposits \9 75 Loans (at par) \ 760 Capital \ 35 If problem loans reduce the market value of the loan portfolio by 25 percent,what is the value of regulatory defined (book value)capital?

FDICIA required that banks and thrifts adopt the same capital requirements.

The implementation of true market value accounting for FIs may have adverse effects on small business finance and economic growth because of the hesitancy of FIs to invest in long-term assets.

Cash and Treasury securities \ 100 million FedFunds Sold \ 100 million Resiclential Mortgages 1-4 family \ 200 million Commercial Loans \ 600 million Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. What is the amount of risk-adjusted assets?

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