\[\begin{array} { l l l l } \text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \\ \text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35 \end{array}\] -If 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. E) $0. A) $35 million. B) -$155 million. C) $7 million. D) -$7 million. E) $0.

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns). Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights \[\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \\ \hline \begin{array} { l } \text { Municipal General } \\ \text { Obligation Bonds } \end{array} & \$ 60 & & \\ \hline \begin{array} { l } \text { Residential Mortgages } \\ \text { l-4 family } \\ ( 80 \% - 90 \% \text { LTV) } \end{array} & \$ 100 & \begin{array} { l } \text { Perpetual Preferred } \\ \text { Stock } \end{array} & \$ 20 \\ \hline \begin{array} { l } \text { Commercial loans } \\ \text { BB + rated } \end{array} & \$ 200 & \text { Equity } & \$ 10 \\ \hline \text { Total Assets } & \$ 400 & & \$ 400 \\ \hline \end{array}\] Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -What is the credit equivalent amount of the off-balance-sheet interest rate swaps if it is in-the-money by $1 million?

A) $1.0 million. B) $2.0 million. C) $3.0 million. D) $4.0 million. E) $5.0 million. A) $1.0 million. B) $2.0 million. C) $3.0 million. D) $4.0 million. E) $5.0 million.

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns). Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights \[\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \\ \hline \begin{array} { l } \text { Municipal General } \\ \text { Obligation Bonds } \end{array} & \$ 60 & & \\ \hline \begin{array} { l } \text { Residential Mortgages } \\ \text { l-4 family } \\ ( 80 \% - 90 \% \text { LTV) } \end{array} & \$ 100 & \begin{array} { l } \text { Perpetual Preferred } \\ \text { Stock } \end{array} & \$ 20 \\ \hline \begin{array} { l } \text { Commercial loans } \\ \text { BB + rated } \end{array} & \$ 200 & \text { Equity } & \$ 10 \\ \hline \text { Total Assets } & \$ 400 & & \$ 400 \\ \hline \end{array}\] Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -What is the credit equivalent amount of the off-balance-sheet foreign exchange contracts if it is out-of-the-money by $4 million?

A) $1.0 million. B) $2.0 million. C) $5.0 million. D) $6.0 million. E) $9.0 million. A) $1.0 million. B) $2.0 million. C) $5.0 million. D) $6.0 million. E) $9.0 million.

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns). Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights \[\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \\ \hline \begin{array} { l } \text { Municipal General } \\ \text { Obligation Bonds } \end{array} & \$ 60 & & \\ \hline \begin{array} { l } \text { Residential Mortgages } \\ \text { l-4 family } \\ ( 80 \% - 90 \% \text { LTV) } \end{array} & \$ 100 & \begin{array} { l } \text { Perpetual Preferred } \\ \text { Stock } \end{array} & \$ 20 \\ \hline \begin{array} { l } \text { Commercial loans } \\ \text { BB + rated } \end{array} & \$ 200 & \text { Equity } & \$ 10 \\ \hline \text { Total Assets } & \$ 400 & & \$ 400 \\ \hline \end{array}\] Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -Is the bank adequately capitalized for its on-balance-sheet assets based on the Basel standards?

A) Yes, because both Tier I and Tier II capital each exceed the required minimum. B) Yes, because both the Tier I and Tier II combined exceeds the required minimum. C) No, because both Tier I and Tier II capital each are below the required minimum. D) No, because Tier I is below the required minimum while Tier II exceeds the required minimum. E) No, because Tier I is above the required minimum while Tier II is below the required minimum. A) Yes, because both Tier I and Tier II capital each exceed the required minimum. B) Yes, because both the Tier I and Tier II combined exceeds the required minimum. C) No, because both Tier I and Tier II capital each are below the required minimum. D) No, because Tier I is below the required minimum while Tier II exceeds the required minimum. E) No, because Tier I is above the required minimum while Tier II is below the required minimum.

Exam 20: Capital Adequacy

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.

(True/False)

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Question 21

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

(True/False)

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Question 22

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

(True/False)

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Question 23

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

(Multiple Choice)

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Question 24

In evaluating the risk-adjusted asset value of foreign exchange forward contracts, the value of the current exposure can be either positive or zero.

(True/False)

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Question 25

Securities (at par) \ 250 Deposits \ 975 Loans (at par) \ 760 Capital \ 35 -If the loan portfolio consists of a five-year, 10 percent annual coupon loan selling at par, what is the market, or economic, value of capital if interest rates increase 1 percent?

(Multiple Choice)

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Question 26

The primary difference between Basel I and the proposed Basel III in converting OBS values to on-balance-sheet credit equivalent amounts is

(Multiple Choice)

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Question 27

Securities (at par) \ 250 Deposits \ 975 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 28

Bank regulators set minimum capital standards to

(Multiple Choice)

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Question 29

The Basel I capital requirements as currently implemented include

(Multiple Choice)

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Question 30

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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Question 31

Under Basel III, the credit risk-adjusted value of the bank's on-balance-sheet assets can be found by adding the products of the risk weights for each asset times the market value of each asset.

(True/False)

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Question 32

Market value accounting often is criticized because the error in market valuation of nontraded assets likely will be greater than the error using the original book valuation.

(True/False)

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Question 33

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns). Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights Cash \ 40 Deposits \ 370 Municipal General Obligation Bonds \ 60 Residential Mortgages l-4 family (80\%-90\% LTV) \ 100 Perpetual Preferred Stock \ 20 Commercial loans BB + rated \ 200 Equity \ 10 Total Assets \ 400 \ 400 Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -What is the credit equivalent amount of the off-balance-sheet interest rate swaps if it is in-the-money by $1 million?

(Multiple Choice)

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Question 34

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

(True/False)

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Question 35

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns). Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights Cash \ 40 Deposits \ 370 Municipal General Obligation Bonds \ 60 Residential Mortgages l-4 family (80\%-90\% LTV) \ 100 Perpetual Preferred Stock \ 20 Commercial loans BB + rated \ 200 Equity \ 10 Total Assets \ 400 \ 400 Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -What is the credit equivalent amount of the off-balance-sheet foreign exchange contracts if it is out-of-the-money by $4 million?

(Multiple Choice)

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(78)

Question 36

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns). Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights Cash \ 40 Deposits \ 370 Municipal General Obligation Bonds \ 60 Residential Mortgages l-4 family (80\%-90\% LTV) \ 100 Perpetual Preferred Stock \ 20 Commercial loans BB + rated \ 200 Equity \ 10 Total Assets \ 400 \ 400 Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -Is the bank adequately capitalized for its on-balance-sheet assets based on the Basel standards?

(Multiple Choice)

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Question 37

The Basel capital requirements are based upon the premise that

(Multiple Choice)

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Question 38

The calculation of the risk-adjusted asset values of OBS market contracts

(Multiple Choice)

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Question 39

How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)?

(Multiple Choice)

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Question 40

Exam 20: Capital Adequacy

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.

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

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

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

In evaluating the risk-adjusted asset value of foreign exchange forward contracts, the value of the current exposure can be either positive or zero.

Securities (at par) \ 250 Deposits \ 975 Loans (at par) \ 760 Capital \ 35 -If the loan portfolio consists of a five-year, 10 percent annual coupon loan selling at par, what is the market, or economic, value of capital if interest rates increase 1 percent?

The primary difference between Basel I and the proposed Basel III in converting OBS values to on-balance-sheet credit equivalent amounts is

Securities (at par) \ 250 Deposits \ 975 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?

Bank regulators set minimum capital standards to

The Basel I capital requirements as currently implemented include

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.

Under Basel III, the credit risk-adjusted value of the bank's on-balance-sheet assets can be found by adding the products of the risk weights for each asset times the market value of each asset.

Market value accounting often is criticized because the error in market valuation of nontraded assets likely will be greater than the error using the original book valuation.

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

The Basel capital requirements are based upon the premise that

The calculation of the risk-adjusted asset values of OBS market contracts

How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)?

Why Are Financial Institutions Special

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