Q&A Hero

Q: Banks typically have faced few restrictions in expanding their businesses, while securities firms and insurance companies have faced complex rules regarding expansion.

Q: Historically, regulations have encouraged the expansion of bank offices domestically.

Q: Expansion on a de novo basis implies the establishment and construction of a new office in a location where previously no office existed.

Q: Increased competition for securities underwritings should reduce the spreads and thus lower the price paid for the securities by the investing public.

Q: The required monitoring and surveillance efforts of several regulatory bodies in the case of large holding companies with multi-subsidiaries may actually decrease the efficiency of regulatory oversight.

Q: The existence of the "too big to fail" doctrine may encourage large banks to take excessive risks in securities underwriting activities.

Q: Chinese walls are barriers within organizations that limit the flow of confidential information between departments of business areas.

Q: Tie-ins and third-party loans are prohibited by current bank regulations.

Q: The process of using lending power to coerce a loan customer to use products sold by a securities affiliate is called information transfer.

Q: The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.

Q: Information transfer refers to the conflict of interest that occurs when banks have the power to sell nonbank products.

Q: Economies of scope opportunities seem to be available in the financial services industry, but economies of scale opportunities do not seem to exist.

Q: Research suggests that the total risk exposure of a financial services organization could actually increase if there is excessive product expansion in some nonbank lines.

Q: The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can be enhanced over time by the product diversification benefits of a more stable earnings stream caused by having well-diversified financial services.

Q: A fully integrated universal bank allows a bank to engage in securities activities only through a separately owned securities affiliate.

Q: In late 2012, shadow banking activities came under federal government regulation.

Q: The specialized nature in which credit intermediation is performed by shadow banks makes the process less cost efficient than if done by traditional banks.

Q: Of the ten largest financial service firms in the world, none are headquartered in the U.S.

Q: The Financial Services Modernization Act of 1999 has provided for more standardized relationships among financial service sectors and commerce.

Q: The barriers among nonbank financial service firms and commercial firms are generally much stronger than the barriers separating banking and commercial sector activities.

Q: Under the Financial Services Modernization Act of 1999, commercial banks can own and actively manage nonfinancial corporations.

Q: The Financial Services Modernization Act of 1999 prohibits insurance companies from opening commercial banks.

Q: The Financial Services Modernization Act of 1999 allows bank holding companies to open insurance underwriting affiliates.

Q: Historically, commercial banks have been prohibited from acting as an underwriter of insurance products.

Q: The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.

Q: In recent years, commercial banks have attempted to expand their activities into nonbanking areas, but securities firms have not been interested in expanding into commercial banking.

Q: In the banking environment, economic and legal firewalls often have been designed to separate the risks of investment bank affiliate activities from commercial banks.

Q: Banks have been permitted to acquire existing investment banks since 1997.

Q: Section 20 affiliates allow banks to transact previously ineligible securities activities.

Q: The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury securities.

Q: In the U.S., the Glass-Steagall Act limited the integration of commercial banking and securities activities.

Q: The commercial paper market is an example of nonbank competition on the asset side of the balance sheet that has become increasingly intense for banks.

Q: Banks increasingly have been susceptible to nonbank competition on both sides of the balance sheet.

Q: A universal FI is an FI that has expanded its operations across country lines.

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Q: If Bank C agrees to be purchased by Banks A and B, what proportion of assets of Bank C should be taken by Banks A and B, respectively in order to have equal post-merger assets? A. 52 percent and 48 percent. B. 50 percent and 40 percent. C. 56 percent and 44 percent. D. 40 percent and 50 percent. E. 45 percent and 55 percent.

Q: If Bank C splits into two separate institutions at its original size each, what is the new Herfindahl (HHI) Index? A. 60. B. 340. C. 2,538. D. 2,847. E. 10,000.

Q: 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.

Q: The evaluation of credit risk of off-balance-sheet (OBS) assets under Basel III requires that the notional amount of OBS items be converted to credit equivalent amounts of on-balance-sheet items.

Q: Similar to Basel II, Basel III will require banks to assign on-balance-sheet assets to one of four categories of credit risk exposure.

Q: 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.

Q: 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.

Q: The determination of risk-adjusted on-balance-sheet assets under Basel III requires the segregation of assets into nine categories of credit risk exposure.

Q: 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.

Q: Basel II attempts to encourage market discipline by having banks disclose capital structure, risk exposures, and capital adequacy in a systematic manner.

Q: 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.

Q: Under Basel II (2006), operational risk can be measured by four different approaches.

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

Q: Under Basel II (2006), regulatory minimum capital requirements for credit, market, and operational risks are covered in the first pillar of the regulation.

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

Q: 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.

Q: Under Basel II (2006), total capital is equal to Tier I capital plus Tier II capital.

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

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

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

Q: Under FDICIA, the ability for regulators to show forbearance is limited by a set of mandatory actions for each level of capital that an FI achieved.

Q: The Tier I leverage ratio measures the amount of an FI's total capital relative to total assets.

Q: The greater the Tier I leverage using the Standardized Approach under Basel III, the more highly leveraged the bank.

Q: Under Basel III a depository institution's capital is divided into five categories.

Q: Basel III capital ratios will become fully effective in 2016.

Q: Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-20009.

Q: FDICIA required that banks and thrifts adopt the same capital requirements.

Q: The SEC requires securities firms to follow capital rules that utilize market value accounting.

Q: The implementation of true market value accounting for FIs may have adverse effects on small business finance and economic growth because of the hesitancy of FIs to invest in long-term assets.

Q: Market value accounting is likely to increase the variability of earnings of an FI.

Q: Market value accounting often is said to be difficult to implement because of the amounts of nontraded assets.

Q: 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.

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

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

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

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

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

Q: 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.

Q: The book value of bonds and loans reflects the market value of those assets when they were placed on the books of an FI.

Q: If an FI were closed by regulators before its economic net worth became zero, neither liability holders nor those regulators guaranteeing the claims of liability holders would stand to lose.

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

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

Q: The book value of equity is seldom equal to the market value of equity.

Q: The market value of capital is equal to market value of assets minus the market value of liabilities.

Q: If the value of equity is less than zero on a mark-to-market accounting basis, liquidation of the FI may result in losses to the depositors or creditors.