Question 1

Except in cases of extreme credit risk shocks or interest rate risk shocks,the book value of equity is equal to the economic or market value of equity.

Accepted Answer

A) True 
 B)False

Question 2

Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.

Accepted Answer

A) True 
 B)False

Question 3

Failure to meet the capital conservations buffer and the countercyclical buffer guidelines instituted under Basel III will result in limits to all of the following except

Accepted Answer

A) bonuses paid to executives of the institution. 
B) regularly scheduled dividends paid to stockholders. 
C) special dividends meant to distribute retained earnings to stockholders. 
D) lending to international entities. 
A) bonuses paid to executives of the institution. 
B) regularly scheduled dividends paid to stockholders. 
C) special dividends meant to distribute retained earnings to stockholders. 
D) lending to international entities.

Question 4

Which of the following is NOT a criticism of the Basel I risk-based capital ratio?

Accepted Answer

A) All commercial loans are given equal weight regardless of the credit risk of the borrower. 
B) The ratio incorporates off-balance-sheet risk exposures. 
C) Grouping assets into different risk categories may encourage balance sheet asset allocation games. 
D) The treatment does not include interest rate or foreign exchange risk. 
A) All commercial loans are given equal weight regardless of the credit risk of the borrower. 
B) The ratio incorporates off-balance-sheet risk exposures. 
C) Grouping assets into different risk categories may encourage balance sheet asset allocation games. 
D) The treatment does not include interest rate or foreign exchange risk.

Question 5

Broker-dealers must ensure that aggregated indebtedness is not less than

Accepted Answer

A) 15 times larger than liquid assets. 
B) 15 times larger than equity. 
C) 25 percent of net worth. 
D) 2 percent of equity. 
A) 15 times larger than liquid assets. 
B) 15 times larger than equity. 
C) 25 percent of net worth. 
D) 2 percent of equity.

Question 6

Basel III guidelines for determining credit risk-adjusted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

Accepted Answer

A) True 
 B)False

Question 7

Losses in asset values due to adverse changes in interest rates are borne initially by the

Accepted Answer

A) equity holders of an FI. 
B) liability holders of an FI. 
C) regulatory authorities. 
D) taxpayers. 
A) equity holders of an FI. 
B) liability holders of an FI. 
C) regulatory authorities. 
D) taxpayers.

Question 8

$\begin{array}{lccc}
  \text { Securities (at par) } & \text { \$ 250  Deposits}& \$975  \
 \text { Loans (at par)} &    \text {  \$ 760  Capital} & \$ 35
\end{array}$
 How would regulators characterize this FI based on the Standardized Approach leverage ratio zones of Basel III?

Accepted Answer

A) Well capitalized 
B) Undercapitalized 
C) Severely undercapitalized 
D) Overcapitalized 
A) Well capitalized 
B) Undercapitalized 
C) Severely undercapitalized 
D) Overcapitalized

Question 9

In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts,the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.

Accepted Answer

A) True 
 B)False

Question 10

The concept of prompt corrective action refers to the requirement

Accepted Answer

A) that bank managers must address problems in the loan portfolio when they are first identified. 
B) that regulators must take specific actions when bank capital levels fall outside the well-capitalized category. 
C) that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent. 
D) that regulators must take specific actions when bank capital levels fall outside the well-capitalized category and that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent. 
A) that bank managers must address problems in the loan portfolio when they are first identified. 
B) that regulators must take specific actions when bank capital levels fall outside the well-capitalized category. 
C) that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent. 
D) that regulators must take specific actions when bank capital levels fall outside the well-capitalized category and that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent.

Question 11

Under Basel II (2006),operational risk can be measured by four different approaches.

Accepted Answer

A) True 
 B)False

Question 12

Under Basel III,banks must hold a total capital to credit risk-adjusted assets equal to 8 percent to be adequately capitalized.

Accepted Answer

A) True 
 B)False

Question 13

The SEC requires securities firms to follow capital rules that utilize market value accounting.

Accepted Answer

A) True 
 B)False

Question 14

Counter party credit risk in OBS contracts

Accepted Answer

A) is the risk that the counterparty will likely default when he is in the money on a contract position. 
B) refers to the risk that a counterparty will default when suffering large actual or potential losses on its position. 
C) requires the counterparty to return to the market and replace contracts at less favorable terms. 
D) All of the options. 
A) is the risk that the counterparty will likely default when he is in the money on a contract position. 
B) refers to the risk that a counterparty will default when suffering large actual or potential losses on its position. 
C) requires the counterparty to return to the market and replace contracts at less favorable terms. 
D) All of the options.

Question 15

When a substandard loan is identified by a regulator,it is required that the loan immediately be charged off by the bank.

Accepted Answer

A) True 
 B)False

Question 16

The bank is considering changing its asset mix by moving $100 million of commercial loans into Treasury securities.If it does change the asset mix and capital remains the same,the risk-based capital ratio

Accepted Answer

A) will not change because the total assets have not changed. 
B) will decrease because the earnings rate on Treasuries is less than on loans. 
C) will increase by 16.67 percent. 
D) will increase because the assets will have less risk. 
A) will not change because the total assets have not changed. 
B) will decrease because the earnings rate on Treasuries is less than on loans. 
C) will increase by 16.67 percent. 
D) will increase because the assets will have less risk.

Question 17

Using a strict market value accounting might cause regulators to

Accepted Answer

A) revert to book value accounting in order to determine net worth. 
B) close banks too early under prompt corrective action requirements. 
C) exempt Dis from prompt corrective action. 
D) allow banks to operate without oversight even with negative net worth. 
A) revert to book value accounting in order to determine net worth. 
B) close banks too early under prompt corrective action requirements. 
C) exempt Dis from prompt corrective action. 
D) allow banks to operate without oversight even with negative net worth.

Question 18

If the value of equity is less than zero on a mark-to-market accounting basis,liquidation of the FI would result in losses to the shareholders.

Accepted Answer

A) True 
 B)False

Question 19

The purpose of the countercyclical buffer proposed by Basel III is to

Accepted Answer

A) expose those banks with inadequate capital to survive economic downturns. 
B) assist insolvent banks build capital during economic expansions. 
C) protect the banking system and reduce systematic exposures to economic downturns. 
D) enhance global movement of funds to those countries experiencing excess aggregate credit growth. 
A) expose those banks with inadequate capital to survive economic downturns. 
B) assist insolvent banks build capital during economic expansions. 
C) protect the banking system and reduce systematic exposures to economic downturns. 
D) enhance global movement of funds to those countries experiencing excess aggregate credit growth.

Exam 20: Capital Adequacy

Except in cases of extreme credit risk shocks or interest rate risk shocks,the book value of equity is equal to the economic or market value of equity.

Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.

Failure to meet the capital conservations buffer and the countercyclical buffer guidelines instituted under Basel III will result in limits to all of the following except

Which of the following is NOT a criticism of the Basel I risk-based capital ratio?

Broker-dealers must ensure that aggregated indebtedness is not less than

Basel III guidelines for determining credit risk-adjusted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

Losses in asset values due to adverse changes in interest rates are borne initially by the

Securities (at par) \ 250 Deposits \9 75 Loans (at par) \ 760 Capital \ 35 How would regulators characterize this FI based on the Standardized Approach leverage ratio zones of Basel III?

In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts,the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.

The concept of prompt corrective action refers to the requirement

Under Basel II (2006),operational risk can be measured by four different approaches.

Under Basel III,banks must hold a total capital to credit risk-adjusted assets equal to 8 percent to be adequately capitalized.

The SEC requires securities firms to follow capital rules that utilize market value accounting.

Counter party credit risk in OBS contracts

When a substandard loan is identified by a regulator,it is required that the loan immediately be charged off by the bank.

The bank is considering changing its asset mix by moving $100 million of commercial loans into Treasury securities.If it does change the asset mix and capital remains the same,the risk-based capital ratio

Using a strict market value accounting might cause regulators to

If the value of equity is less than zero on a mark-to-market accounting basis,liquidation of the FI would result in losses to the shareholders.

The purpose of the countercyclical buffer proposed by Basel III is to

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