Question 1

The risk-adjusted asset values of OBS market contracts or derivative instruments are determined in a manner similar to the risk-adjusted asset values of contingent guarantee claims.

Accepted Answer

A) True 
 B)False

Question 2

Equity holders absorb credit losses on the asset portfolio because liability holders are junior claimants.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is not a category of capital under Basel III?

Accepted Answer

A) Tier III capital. 
B) Tier II capital. 
C) Common Equity Tier I. 
D) Total risk-based capital. 
E) Tier I capital.

Question 4

Under International Financial Reporting Standards, FIs have flexible rules in recognizing the amount and timing of loan losses.

Accepted Answer

A) True 
 B)False

Question 5

The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.

Accepted Answer

The answer of The four (five) risk weight categories in...

Question 6

The Basel capital requirements are based upon the premise that

Accepted Answer

A) banks with riskier assets should have higher capital ratios. 
B) banks with riskier assets should have lower capital ratios. 
C) banks with riskier assets should have lower absolute amounts of capital. 
D) banks with riskier assets should have higher absolute amounts of capital. 
E) there is no relationship between asset risk and capital.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 these. 
E) that Basel II considers OBS assets, and a heavier reliance on the use of ratings by external credit rating agencies for the assignment of assets to weight classes.

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 benefits may not support the significant cost of developing and implementing new risk management systems.

Accepted Answer

The answer of The benefits may not support the significant...

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

A criticism of the Basel I risk-based capital ratio is

Accepted Answer

A) the incorporation of off-balance-sheet risk exposures. 
B) the application of a similar capital requirement across major banks in international banking centers across the world. 
C) the more systematic accounting of credit risk differences. 
D) the lack of appropriate consideration of the portfolio diversification effects of credit risk. 
E) the application of a similar capital requirement across major banks in international banking centres across the world, and the more systematic accounting of credit risk differences.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

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

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

Accepted Answer

A) Trademarks. 
B) Goodwill. 
C) Patents. 
D) Bank premises. 
E) None of these.

Question 17

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 18

Because DTIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.

Accepted Answer

The answer of Because DTIs may have little incentive to...

Question 19

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 20

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

Exam 20: Capital Adequacy

The risk-adjusted asset values of OBS market contracts or derivative instruments are determined in a manner similar to the risk-adjusted asset values of contingent guarantee claims.

Equity holders absorb credit losses on the asset portfolio because liability holders are junior claimants.

Which of the following is not a category of capital under Basel III?

Under International Financial Reporting Standards, FIs have flexible rules in recognizing the amount and timing of loan losses.

The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.

The Basel capital requirements are based upon the premise that

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

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

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 benefits may not support the significant cost of developing and implementing new risk management systems.

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

A criticism of the Basel I risk-based capital ratio is

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

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

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

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

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

Because DTIs may have little incentive to make high risk commercial loans, one important aspect of intermediation may be somewhat curtailed.

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

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.