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

A) $130.0 million. B) $685.0 million. C) $720.0 million. D) $630.0 million. E) $900.0 million. A) $130.0 million. B) $685.0 million. C) $720.0 million. D) $630.0 million. E) $900.0 million.

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 -Is Fifth Bank currently over or under capitalized for on-balance-sheet assets in order to be considered well capitalized according to Basel III?

A) Overcapitalized for both Tier I and Total capital standards. B) Overcapitalized for Tier I standard; Undercapitalized for Total standard. C) Undercapitalized for Tier I standard; Overcapitalized for Total standard. D) Undercapitalized for both Tier I and Total capital standards. E) Unable to determine. A) Overcapitalized for both Tier I and Total capital standards. B) Overcapitalized for Tier I standard; Undercapitalized for Total standard. C) Undercapitalized for Tier I standard; Overcapitalized for Total standard. D) Undercapitalized for both Tier I and Total capital standards. E) Unable to determine.

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 minimum total risk-adjusted capital (Tier I + Tier II) required for both of the off-balance-sheet letters of credit under the Basel II standards?

A) $3.84 million. B) $3.68 million. C) $3.20 million. D) $4.80 million. E) $6.40 million. A) $3.84 million. B) $3.68 million. C) $3.20 million. D) $4.80 million. E) $6.40 million.

$\begin{array}{c} \begin{array}{lll} \text {Cash and Treasury securities}\\ \text {Fed Funds Sold}\\ \text {Residential Mortgages 1-4 family}\\ \text {Commercial Loans} \end{array} \begin{array}{lll} \text { \$ 100 million}\\ \text {\$ 100 million}\\ \text { \$ 200 million}\\ \text {\$ 600 million} \end{array} \end{array}$ Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. -If the bank has capital of $50 million, what is the leverage ratio using the standardized approach?

A) 5.00 percent. B) 8.33 percent. C) 25.0 percent. D) 50.0 percent. E) None of the abovE. A) 5.00 percent. B) 8.33 percent. C) 25.0 percent. D) 50.0 percent. E) None of the abovE.

Exam 20: Capital Adequacy

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. Cash \ 80 Deposits \ 550 Municipal General Obligation Bonds \ 100 Residential Mortgages 1-4 family (LTV 60\% - 80\%) \ 220 Long-Term Debt \ 290 Commercial loans \ 500 Equity \ 60 Total Assets \ 900 \ 900 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 amount of risk adjusted on-balance-sheet assets of the bank as defined under the Basel II standards?

(Multiple Choice)

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Question 121

Each of the following is a function of capital EXCEPT

(Multiple Choice)

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Question 122

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

(True/False)

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Question 123

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

(Multiple Choice)

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Question 124

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. Cash \ 80 Deposits \ 550 Municipal General Obligation Bonds \ 100 Residential Mortgages 1-4 family (LTV 60\% - 80\%) \ 220 Long-Term Debt \ 290 Commercial loans \ 500 Equity \ 60 Total Assets \ 900 \ 900 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 -Is Fifth Bank currently over or under capitalized for on-balance-sheet assets in order to be considered well capitalized according to Basel III?

(Multiple Choice)

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Question 125

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.

(True/False)

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Question 126

More frequent regulatory examinations and stricter regulator standards will cause greater discrepancies in book value of equity and the market value of equity.

(True/False)

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Question 127

Under Basel III, Tier I capital measures the market value of common equity plus the amount of perpetual preferred stock plus minority equity interest held by the bank in subsidiaries minus goodwill.

(True/False)

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Question 128

The concept of prompt corrective action refers to the requirement

(Multiple Choice)

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Question 129

Basel I (1993) requires banks in the member countries of the Bank for International Settlements to utilize risk-based capital ratios.

(True/False)

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Question 130

Broker-dealers must calculate a market value for their net worth on a day-to-day basis and ensure that their net worth-assets ratio

(Multiple Choice)

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Question 131

The risk-based capital ratio fails to take into account the effects of diversification in the credit portfolio.

(True/False)

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Question 132

As compared to Basel I, the standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DIs are facing.

(True/False)

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(74)

Question 133

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 minimum total risk-adjusted capital (Tier I + Tier II) required for both of the off-balance-sheet letters of credit under the Basel II standards?

(Multiple Choice)

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Question 134

The risk-based capital ratio does account for loans made to companies with different credit ratings.

(True/False)

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Question 135

The Basel II Accord effective at year-end 2007 in the United States

(Multiple Choice)

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Question 136

Cash and Treasury securities Fed Funds Sold Residential Mortgages 1-4 family Commercial Loans \ 100 million \ 100 million \ 200 million \ 600 million Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent. -If the bank has capital of $50 million, what is the leverage ratio using the standardized approach?

(Multiple Choice)

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Question 137

Operational risk has increased to a point that the Bank for International Settlements (BIS) will require DIs to account for it in the capital adequacy standards under Basel II.

(True/False)

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Question 138

The Basel capital requirements differ from previous capital standards in all except one of the following ways?

(Multiple Choice)

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Question 139

A life insurance company that is a parent company is not required to hold an equivalent amount of risk-based capital to protect against financial downturns of affiliates.

(True/False)

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Question 140

Exam 20: Capital Adequacy

Each of the following is a function of capital EXCEPT

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

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

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.

More frequent regulatory examinations and stricter regulator standards will cause greater discrepancies in book value of equity and the market value of equity.

Under Basel III, Tier I capital measures the market value of common equity plus the amount of perpetual preferred stock plus minority equity interest held by the bank in subsidiaries minus goodwill.

The concept of prompt corrective action refers to the requirement

Basel I (1993) requires banks in the member countries of the Bank for International Settlements to utilize risk-based capital ratios.

Broker-dealers must calculate a market value for their net worth on a day-to-day basis and ensure that their net worth-assets ratio

The risk-based capital ratio fails to take into account the effects of diversification in the credit portfolio.

As compared to Basel I, the standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DIs are facing.

The risk-based capital ratio does account for loans made to companies with different credit ratings.

The Basel II Accord effective at year-end 2007 in the United States

Operational risk has increased to a point that the Bank for International Settlements (BIS) will require DIs to account for it in the capital adequacy standards under Basel II.

The Basel capital requirements differ from previous capital standards in all except one of the following ways?

A life insurance company that is a parent company is not required to hold an equivalent amount of risk-based capital to protect against financial downturns of affiliates.

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