Question 1

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 2

Under Basel III, OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-adjusted asset values.

Accepted Answer

A) True 
 B)False

Question 3

An FI may be insolvent in market value terms even if the book value of equity is positive.

Accepted Answer

A) True 
 B)False

Question 4

Book value accounting systems recognize the impact of interest rate problems sooner than credit risk problems.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Match between columns
                        Premises:    The benefits may not support the significant cost of developing and implementing new risk management systems. 
   The BIS plans largely ignore the covariance among asset risks between different parties. 
   Banks in the U.S. likely would need additional capital to meet the new minimum standards. 
   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. 
   Regulators may not be trained or willing to make the necessary decisions that may rely heavily on judgment. 
   Because DIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed. 
   The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk. 
   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.

Accepted Answer

The Answer of  Competition  and  Impact on is...

Question 7

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. 
E) of mergers between large banks. 
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. 
E) of mergers between large banks.

Question 8

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. 
E) buyback programs of common stock. 
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. 
E) buyback programs of common stock.

Question 9

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 10

Through August 2012, which of the following approximates the amount of dividends and assessments that the U.S. Treasury has received from entities participating in the TARP Capital Purchase Program?

Accepted Answer

A) $2.1 billion. 
B) $1.2 billion. 
C) $12.2 billion. 
D) $16.0 billion. 
E) $26.25 billion. 
A) $2.1 billion. 
B) $1.2 billion. 
C) $12.2 billion. 
D) $16.0 billion. 
E) $26.25 billion.

Question 11

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 letters of credit, both standby and commercial?

Accepted Answer

A) $9.6 million. 
B) $16.0 million. 
C) $48 million. 
D) $72 million. 
E) $80 million. 
A) $9.6 million. 
B) $16.0 million. 
C) $48 million. 
D) $72 million. 
E) $80 million.

Question 12

Which approach used in calculating capital to cover operational risk allow banks to rely on internal data for the calculation of regulatory capital requirements?

Accepted Answer

A) Standardized approach. 
B) Advanced measurement approach. 
C) Basic indicator approach. 
D) Internal ratings-based approach. 
E) All of the above. 
A) Standardized approach. 
B) Advanced measurement approach. 
C) Basic indicator approach. 
D) Internal ratings-based approach. 
E) All of the above.

Question 13

The leverage ratio specified under FDICIA does not account for the risks of off-balance-sheet activities.

Accepted Answer

A) True 
 B)False

Question 14

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. 
E) The weights in the four risk categories imply a cardinal measurement of relevant risk between each category. 
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. 
E) The weights in the four risk categories imply a cardinal measurement of relevant risk between each category.

Question 15

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. 
E) suspend regulatory capital requirements during temporary spikes in interest rates. 
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. 
E) suspend regulatory capital requirements during temporary spikes in interest rates.

Question 16

Protecting FI insurance funds in the event of an FI failure is the responsibility of taxpayers.

Accepted Answer

A) True 
 B)False

Question 17

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 is the minimum Tier 1 and Total risk-based capital Fifth Bank needs in order to be considered adequately capitalized under Basel III capital requirements for both on-balance sheet and off-balance sheet items?

Accepted Answer

A) $40.71 million; $63.0 million. 
B) $38.91 million; $51.88 million. 
C) $51.88 million; $64.85 million. 
D) $50.40 million; $67.5 million. 
E) $38.91 million; $50.40 million. 
A) $40.71 million; $63.0 million. 
B) $38.91 million; $51.88 million. 
C) $51.88 million; $64.85 million. 
D) $50.40 million; $67.5 million. 
E) $38.91 million; $50.40 million.

Question 18

The Basic Indicator Approach in calculating capital to cover operational risk requires banks to hold 12 percent of total assets in capital to cover operational risk exposure.

Accepted Answer

A) True 
 B)False

Question 19

Under Generally Accepted Accounting Principles, FIs have flexible rules in recognizing the amount and timing of loan losses.

Accepted Answer

A) True 
 B)False

Question 20

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 above. 
E) None of the above. 
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 above. 
E) None of the above.

Exam 20: Capital Adequacy

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

Under Basel III, OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-adjusted asset values.

An FI may be insolvent in market value terms even if the book value of equity is positive.

Book value accounting systems recognize the impact of interest rate problems sooner than credit risk problems.

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

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

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

Through August 2012, which of the following approximates the amount of dividends and assessments that the U.S. Treasury has received from entities participating in the TARP Capital Purchase Program?

Which approach used in calculating capital to cover operational risk allow banks to rely on internal data for the calculation of regulatory capital requirements?

The leverage ratio specified under FDICIA does not account for the risks of off-balance-sheet activities.

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

Using a strict market value accounting might cause regulators to

Protecting FI insurance funds in the event of an FI failure is the responsibility of taxpayers.

The Basic Indicator Approach in calculating capital to cover operational risk requires banks to hold 12 percent of total assets in capital to cover operational risk exposure.

Under Generally Accepted Accounting Principles, FIs have flexible rules in recognizing the amount and timing of loan losses.

Counter party credit risk in OBS contracts

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