Question 1

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

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?

Accepted Answer

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.

Question 2

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 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

The measurement of credit risk under the Basel II Accord allows banks to choose between

Accepted Answer

A) a standardized approach similar to that used under Basel I. 
B) a basic indicator approach that will cause banks to hold an additional 12 percent of capital. 
C) an internal rating system in which they must adhere to strict methodological and disclosure standards. 
D) All of the options. 
E) a standardized approach similar to that used under Basel I and an internal rating system in which they must adhere to strict methodological and disclosure standards.

Question 7

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

Question 8

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

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?

Accepted Answer

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

Question 9

The buffer proposed by Basel III that is designed to ensure that DIs build up a capital surplus outside of periods of financial distress is called the

Accepted Answer

A) Capital conservation buffer. 
B) Countercyclical buffer. 
C) Leverage buffer. 
D) Tier II buffer.

Question 10

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.

Question 11

Under market value accounting methods,FIs

Accepted Answer

A) must write down the value of their assets to fully reflect market values. 
B) have a great deal of discretion in timing the write downs of problem loans. 
C) must conform to regulatory write-down schedules. 
D) have an incentive to fully reflect problem assets as they become known.

Question 12

A property-casualty (P-C)insurance firm has estimated the following risk-based capital charge for its individual risk classes: $\begin{array}{l}
\begin{array}{lll}
Risk\
R0 \
R 1 \
R 2 \
R3\
R4\
R5\
R6\
R7\
Total
\end{array}
\begin{array}{l}
\text {Description}\
\text { AfflliatedP-C } \
\text { Fixed-income assets } \
\text { Common Stock } \
\text { Reinsurance } \
\text { Loss Adjustment Expense } \
\text { Written Premiums } \
\text { Humicane } \
\text { Earthquake }\
\
\end{array}
\begin{array}{l}
\text {RBC Charge}\
\$ 6.0 \text { million } \
\$ 2.0 \text { million } \
\$ 1.0 \text { million } \
\$ 3.0 \text { million } \
\$ 1.0 \text { million } \
\$ 2.0 \text { million } \
\$ 1.0 \text { million } \
\$ 0.5 \text { million }\
\$ 16.50 \text { million }\
\end{array}
\end{array}$ Using the model recommended by the National Association of Insurance Commissioners (NAICs),what is the total risk-based capital charge for the P-C firm?

Accepted Answer

A) $4.36 million. 
B) $10.00 million. 
C) $10.50 million. 
D) $12.50 million.

Question 13

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 14

Which of the following is not included in the Common Equity Tier I capital under Basel III?

Accepted Answer

A) Retained earnings. 
B) Par value of common shares issued by the bank. 
C) Par value of noncumulative perpetual preferred stock. 
D) Paid-in excess (surplus)of common stock.

Question 15

Under Basel III,Globally Systematically Important Banks (G-SIBs)were identified by the Bank for International Settlements (BISs)by all of the following indicators except

Accepted Answer

A) Size. 
B) Lack of substitutes for the institution's services. 
C) Cross-jurisdictional activity. 
D) Interconnectedness with other institutions. 
E) Ability to obtain insurance or other guarantees on deposits.

Question 16

Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-2009.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

The Standardized Approach in calculating capital to cover operational risk requires DIs to separate activities into business units from which a capital charge is determined based on the amount of operational risk in each unit.

Accepted Answer

A) True 
 B)False

Exam 20: Capital Adequacy

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

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

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

The measurement of credit risk under the Basel II Accord allows banks to choose between

The buffer proposed by Basel III that is designed to ensure that DIs build up a capital surplus outside of periods of financial distress is called the

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

Under market value accounting methods,FIs

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

Which of the following is not included in the Common Equity Tier I capital under Basel III?

Under Basel III,Globally Systematically Important Banks (G-SIBs) were identified by the Bank for International Settlements (BISs) by all of the following indicators except

Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-2009.

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

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.

The Standardized Approach in calculating capital to cover operational risk requires DIs to separate activities into business units from which a capital charge is determined based on the amount of operational risk in each unit.