Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) may be done using the Basic Indicator Approach. 
B) may be done using the standardized model proposed by regulators. 
C) may be done using the DI's own internal market risk model. 
D) Answers A and B only. 
E) Answers B and C only. 
A) may be done using the Basic Indicator Approach. 
B) may be done using the standardized model proposed by regulators. 
C) may be done using the DI's own internal market risk model. 
D) Answers A and B only. 
E) Answers B and C only. E

Question 3

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

Accepted Answer

A) the probability of an adverse price movement in contracts. 
B) the cost of replacing a contract if a counterparty defaults today. 
C) the probability today of a counterparty contract default in the future. 
D) the maximum price loss for any given position. 
E) Answers A and D only. 
A) the probability of an adverse price movement in contracts. 
B) the cost of replacing a contract if a counterparty defaults today. 
C) the probability today of a counterparty contract default in the future. 
D) the maximum price loss for any given position. 
E) Answers A and D only. C

Question 4

The Tier I leverage ratio measures the amount of an FI's total capital relative to total assets.

Accepted Answer

A) True 
 B)False

Question 5

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 above. 
E) Answers A and C only. 
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 above. 
E) Answers A and C only.

Question 6

Through August 2012, 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 billion. 
B) $120 billion. 
C) $234 billion. 
D) $26 billion. 
E) $19 billion. 
A) $192 billion. 
B) $120 billion. 
C) $234 billion. 
D) $26 billion. 
E) $19 billion.

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

$$\begin{array} { l l l l } 
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-If the loan portfolio consists of five-year, 10 percent annual coupon par value loans, what is the market, or economic, value of capital if interest rates decrease 2 percent?

Accepted Answer

A) $35 million. 
B) $96 million. 
C) $60 million. 
D) -$7 million. 
E) $0. 
A) $35 million. 
B) $96 million. 
C) $60 million. 
D) -$7 million. 
E) $0.

Question 14

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 15

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. 
E) DI management the option to postpone asset write-downs until adequate capital was available. 
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. 
E) DI management the option to postpone asset write-downs until adequate capital was available.

Question 16

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. 
E) Market value accounting may interfere with an FI's special functions as lenders and monitors of credit. 
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. 
E) Market value accounting may interfere with an FI's special functions as lenders and monitors of credit.

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

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. $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 80 & \text { Deposits } & \$ 550 \
\hline \begin{array} { l } 
\text { Municipal General } \
\text { Obligation Bonds }
\end{array} & \$ 100 & & \
\hline \begin{array} { l } 
\text { Residential Mortgages 1-4 family } \
\text { (LTV 60\% - 80\%) }
\end{array} & \$ 220 & \text { Long-Term Debt } & \$ 290 \
\hline \text { Commercial loans } & \$ 500 & \text { Equity } & \$ 60 \
\hline \text { Total Assets } & \$ 900 & & \$ 900 \
\hline
\end{array}$$ 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 20

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

Exam 20: Capital Adequacy

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

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

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

The Tier I leverage ratio measures the amount of an FI's total capital relative to total assets.

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

Through August 2012, which of the following approximates the amount of funds paid back to the U.S. Treasury as part of the TARP Capital Purchase Program?

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.

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

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

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

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

Securities (at par) \ 250 Deposits \ 975 Loans (at par) \ 760 Capital \ 35 -If the loan portfolio consists of five-year, 10 percent annual coupon par value loans, what is the market, or economic, value of capital if interest rates decrease 2 percent?

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

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

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

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.

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?

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

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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