Question 1

Which of the following is NOT a typical argument against market value accounting?

Accepted Answer

A) Market value accounting introduces an unnecessary degree of variability into an FI's earnings. 
B) The use of market value accounting may reduce the willingness of FI's to invest in longer-term assets. 
C) FI's are increasingly trading,selling,and securitizing assets. 
D) Market value accounting is difficult to implement. 
A) Market value accounting introduces an unnecessary degree of variability into an FI's earnings. 
B) The use of market value accounting may reduce the willingness of FI's to invest in longer-term assets. 
C) FI's are increasingly trading,selling,and securitizing assets. 
D) Market value accounting is difficult to implement.

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 the options. 
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 the options.

Question 3

The primary difference between Basel I and the proposed Basel III in calculating risk-adjusted assets is

Accepted Answer

A) that Basel II considers OBS assets. 
B) the use of only three weight classes rather than four classes. 
C) a heavier reliance on the use of ratings by external credit rating agencies for the assignment of assets to weight classes. 
D) All of the options. 
A) that Basel II considers OBS assets. 
B) the use of only three weight classes rather than four classes. 
C) a heavier reliance on the use of ratings by external credit rating agencies for the assignment of assets to weight classes. 
D) All of the options.

Question 4

A criticism of the Basel I risk-based capital ratio is

Accepted Answer

A) the incorporation of off-balance-sheet risk exposures. 
B) the application of a similar capital requirement across major banks in international banking centers across the world. 
C) the more systematic accounting of credit risk differences. 
D) the lack of appropriate consideration of the portfolio diversification effects of credit risk. 
A) the incorporation of off-balance-sheet risk exposures. 
B) the application of a similar capital requirement across major banks in international banking centers across the world. 
C) the more systematic accounting of credit risk differences. 
D) the lack of appropriate consideration of the portfolio diversification effects of credit risk.

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 the total risk-adjusted off-balance-sheet assets of the bank as defined under the Basel II standards?

Accepted Answer

A) $400 million. 
B) $16.5 million. 
C) $11.5 million. 
D) $13.5 million. 
E) $18.5 million. 
A) $400 million. 
B) $16.5 million. 
C) $11.5 million. 
D) $13.5 million. 
E) $18.5 million.

Question 6

The book value of bank equity is the present value of assets minus the present value of liabilities.

Accepted Answer

A) True 
 B)False

Question 7

The book value of equity is seldom equal to the market value of equity.

Accepted Answer

A) True 
 B)False

Question 8

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. 
A) market value accounting concepts. 
B) book value accounting concepts. 
C) the net worth concept. 
D) the economic meaning of capital.

Question 9

In the life insurance model,morbidity risk differs from mortality risk by the circumstances surrounding the actual death event.

Accepted Answer

A) True 
 B)False

Question 10

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk,but not interest rate risk or market risks.

Accepted Answer

A) True 
 B)False

Question 11

The greater the Tier I leverage using the Standardized Approach under Basel III,the more highly leveraged the bank.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements best describes the treatment of adjusting for credit risk of off-balance-sheet activities?

Accepted Answer

A) All OBS activities are treated equally in making credit-risk adjustments. 
B) Standby letter of credit guarantees issued by banks to back commercial paper have a 50 percent conversion factor. 
C) The credit or default risk of over-the-counter contracts is approximately zero. 
D) The current exposure component of the credit equivalent amount of OBS derivative contracts reflects the credit risk if the contract counterparty defaults. 
E) The treatment of interest rate forward,option,and swap contracts differs from the treatment of contingent or guarantee contracts. 
A) All OBS activities are treated equally in making credit-risk adjustments. 
B) Standby letter of credit guarantees issued by banks to back commercial paper have a 50 percent conversion factor. 
C) The credit or default risk of over-the-counter contracts is approximately zero. 
D) The current exposure component of the credit equivalent amount of OBS derivative contracts reflects the credit risk if the contract counterparty defaults. 
E) The treatment of interest rate forward,option,and swap contracts differs from the treatment of contingent or guarantee contracts.

Question 13

It is likely that the discrepancy between book value of equity and market value of equity will increase as volatility in interest rates increases.

Accepted Answer

A) True 
 B)False

Question 14

During the financial crisis of 2008-2009,the FASB provided guidance on asset valuation that allowed

Accepted Answer

A) DI management to use internal cash flow models and assumptions to estimate fair value when there is limited market data available. 
B) regulatory capital of banks to deviate from industry norms. 
C) excess reserves with the Fed to be included as regulatory capital. 
D) DIs to choose either book value treatment or market value treatment of asset valuation. 
A) DI management to use internal cash flow models and assumptions to estimate fair value when there is limited market data available. 
B) regulatory capital of banks to deviate from industry norms. 
C) excess reserves with the Fed to be included as regulatory capital. 
D) DIs to choose either book value treatment or market value treatment of asset valuation.

Question 15

The U.S.banking industry built up record levels of capital in the early 2000s because

Accepted Answer

A) the economy went through a downturn. 
B) problem loans increased. 
C) the regulators required higher amounts of equity sales. 
D) of record high levels of profitability. 
A) the economy went through a downturn. 
B) problem loans increased. 
C) the regulators required higher amounts of equity sales. 
D) of record high levels of profitability.

Question 16

Determining risk-adjusted asset values for OBS market contracts requires multiplying the notional values by the appropriate risk weights.

Accepted Answer

A) True 
 B)False

Question 17

The Basel I capital requirements as currently implemented include

Accepted Answer

A) different credit risks of on-balance-sheet assets. 
B) different credit risks of off-balance-sheet assets. 
C) the consideration of market risk in 1998. 
D) All of the options. 
A) different credit risks of on-balance-sheet assets. 
B) different credit risks of off-balance-sheet assets. 
C) the consideration of market risk in 1998. 
D) All of the options.

Question 18

Those regulatory agencies that have adopted some form of book value accounting standard to measure an FI's capital include all of the following except

Accepted Answer

A) The Securities and Exchange Commission (SE
C) . 
B) The Federal Reserve. 
C) The Office of the Comptroller of the Currency (OC
C) . 
D) The FDIC. 
A) The Securities and Exchange Commission (SE
C) . 
B) The Federal Reserve. 
C) The Office of the Comptroller of the Currency (OC
C) . 
D) The FDIC.

Question 19

Through August 2015,which of the following approximates the amount of funds paid back to the U.S.Treasury as part of the TARP Capital Purchase Program?

Accepted Answer

A) $192.1 billion. 
B) $120.0 billion. 
C) $236.5 billion. 
D) $26.9 billion. 
A) $192.1 billion. 
B) $120.0 billion. 
C) $236.5 billion. 
D) $26.9 billion.

Question 20

In the life insurance model,the ratio of total surplus and capital to the risk-based capital calculation must be greater than or equal to 1.0 for the insurance company to be satisfactorily capitalized.

Accepted Answer

A) True 
 B)False

Exam 20: Capital Adequacy

Which of the following is NOT a typical argument against market value accounting?

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 difference between Basel I and the proposed Basel III in calculating risk-adjusted assets is

A criticism of the Basel I risk-based capital ratio is

The book value of bank equity is the present value of assets minus the present value of liabilities.

The book value of equity is seldom equal to the market value of equity.

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

In the life insurance model,morbidity risk differs from mortality risk by the circumstances surrounding the actual death event.

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk,but not interest rate risk or market risks.

The greater the Tier I leverage using the Standardized Approach under Basel III,the more highly leveraged the bank.

Which of the following statements best describes the treatment of adjusting for credit risk of off-balance-sheet activities?

It is likely that the discrepancy between book value of equity and market value of equity will increase as volatility in interest rates increases.

During the financial crisis of 2008-2009,the FASB provided guidance on asset valuation that allowed

The U.S.banking industry built up record levels of capital in the early 2000s because

Determining risk-adjusted asset values for OBS market contracts requires multiplying the notional values by the appropriate risk weights.

The Basel I capital requirements as currently implemented include

Those regulatory agencies that have adopted some form of book value accounting standard to measure an FI's capital include all of the following except

Through August 2015,which of the following approximates the amount of funds paid back to the U.S.Treasury as part of the TARP Capital Purchase Program?

In the life insurance model,the ratio of total surplus and capital to the risk-based capital calculation must be greater than or equal to 1.0 for the insurance company to be satisfactorily capitalized.

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

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