Q&A Hero

Q: 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.

Q: Market value of equity is more appropriate than book value of equity at reflecting changes in the credit risk and interest rate risk of an FI.

Q: The economic definition of the value of an FI's equity is the book value of assets minus the market value of liabilities.

Q: The function of capital to serve as a source of funds is critical to regulators in setting risk-based deposit insurance premiums.

Q: One function of capital is to provide funding for real assets, such as branches and technology that are necessary to provide financial services.

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

Q: One function of bank capital is to protect uninsured depositors, bondholders, and creditors in the event of insolvency and liquidation.

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

Q: The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders.

Q: Capital is the primary protection for an FI against the risk of insolvency and failure.

Q: Is the firm adequately capitalized if it has total capital and surplus of $10 million? A. No, its total risk-based capital charge is higher than $10 million.B. No, its total risk-based capital charge is lower than $10 million.C. Yes, its total risk-based capital charge is higher than $10 million.D. Yes, its total risk-based capital charge is lower than $10 million.E. No, its total risk-based capital charge is greater than 0.

Q: A property-casualty (P-C) insurance firm has estimated the following risk-based capital charge for its individual risk classes:Using the model recommended by the National Association of Insurance Commissioners (NAIC), what is the total risk-based capital charge for the P-C firm? A. $4.36 million.B. $10.00 million.C. $10.36 million.D. $12.50 million.E. $15.00 million.

Q: 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. 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 millionWhat 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? 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.

Q: 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. 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 millionWhat are the total risk-adjusted off-balance-sheet assets of the bank as defined under the Basel II standards? A. $400 million.B. $16.5 million.C. $11.5 million.D. $13.5 million.E. $18.5 million.

Q: 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.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 millionWhat are, respectively, the credit equivalent value of the letters of credit, interest rate swaps, and FX contracts? A. $10.0 million; $3.5 million; $5.0 million.B. $50.0 million; $300 million; $50.0 million.C. $5.0 million; $1.5 million; $5.0 million.D. $10.0 million; $1.5 million; $5.0 million.E. $5.0 million; $3.5 million; $5.0 million.

Q: 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. 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 millionIs 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.

Q: 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. 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 millionWhat 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.

Q: What is the credit equivalent amount of the off-balance-sheet foreign exchange contracts if it is out-of-the-money by $4 million? A. $1.0 million.B. $2.0 million.C. $5.0 million.D. $6.0 million.E. $9.0 million.

Q: What is the credit equivalent amount of the off-balance-sheet interest rate swaps if it is in-the-money by $1 million? A. $1.0 million. B. $2.0 million. C. $3.0 million. D. $4.0 million. E. $5.0 million.

Q: What is the credit equivalent amount of the off-balance-sheet letters of credit, both standby and commercial? A. $9.6 million.B. $16.0 million.C. $48 million.D. $72 million.E. $80 million.

Q: Is the bank adequately capitalized for its on-balance-sheet assets based on the Basel standards? A. Yes, because both Tier I and Tier II capital each exceed the required minimum. B. Yes, because both the Tier I and Tier II combined exceeds the required minimum. C. No, because both Tier I and Tier II capital each are below the required minimum. D. No, because Tier I is below the required minimum while Tier II exceeds the required minimum. E. No, because Tier I is above the required minimum while Tier II is below the required minimum.

Q: What is the minimum required Tier I and Total risk-based capital for the on-balance-sheet assets in order for the DI to be adequately capitalized? A. $8 million; $8 million. B. $16.87 million; $16.87 million. C. $17.22 million; $22.96 million. D. $22.96 million; $28.70 million. E. $10.8 million; $8 million.

Q: 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.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 corporationOff-balance sheet derivatives (Refer to Table 20-11)$200 million 10-year interest rate swaps$100 million 2-year forward DM contractsWhat is Sigma Bank's risk-adjusted assets as defined by the Basel standards for its on-balance-sheet assets only? A. $400 million.B. $360 million.C. $310 million.D. $287 million.E. $236 million.

Q: What is the ratio of capital to risk-adjusted assets, if the bank has capital of $50 million? A. 5.00 percent. B. 5.56 percent. C. 6.94 percent. D. 8.33 percent. E. 6.25 percent.

Q: Note: The residential mortgages all have a loan-to-value of between 60 and 80 percent.What is the amount of risk-adjusted assets? A. $1,000 million.B. $720 million.C. $900 million.D. $600 million.E. $700 million.

Q: 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.

Q: If the loan portfolio consists of five-year, 10 percent annual coupon par value loans, what is the market, or economic, value of capital if interest rates decrease 2 percent? A. $35 million. B. $96 million. C. $60 million. D. -$7 million. E. $0.

Q: If the loan portfolio consists of a five-year, 10 percent annual coupon loan selling at par, what is the market, or economic, value of capital if interest rates increase 1 percent? A. $35 million. B. -$155 million. C. $7 million. D. -$7 million. E. $0.

Q: Given that 25 percent of the loans have been identified as problem loans, and if historical cost accounting methods allow the bank to write down only 10 percent of the problem loans, what will be the book value of capital? A. $35 million. B. -$155 million. C. $16 million. D. -$7 million. E. $0.

Q: If problem loans reduce the market value of the loan portfolio by 25 percent, what is the market value of capital? A. $35 million. B. -$155 million. C. $7 million. D. -$7 million. E. $0.

Q: If problem loans reduce the market value of the loan portfolio by 25 percent, what is the value of regulatory defined (book value) capital? A. $35 million. B. -$155 million. C. $7 million. D. -$7 million. E. $0.

Q: How would regulators characterize this FI based on the Standardized Approach leverage ratio zones of Basel III? A. Well capitalized. B. Undercapitalized. C. Severely undercapitalized. D. Overcapitalized. E. Insolvent.

Q: In the NAIC model for life insurance companies, this risk measures the liquidity of liabilities for given rate changes. A. Interest rate riskB. Business riskC. Asset riskD. Foreign exchange riskE. Insurance risk

Q: In the NAIC model for life insurance companies, which risk captures the risk of adverse changes in mortality risk and morbidity risk? A. Interest rate risk. B. Business risk. C. Asset risk. D. Foreign exchange risk. E. Insurance risk.

Q: In the NAIC model for life insurance companies, which risk covers the amount of capital necessary to meet the maximum contribution that an insurance company may need to make to the state guarantee fund? A. Interest rate risk. B. Business risk. C. Asset risk. D. Foreign exchange risk. E. Insurance risk.

Q: Which of the following risk categories is NOT covered by the risk-based model for the life insurance industry? A. Interest rate risk. B. Business risk. C. Asset risk. D. Foreign exchange risk. E. Insurance risk.

Q: 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 A. exceeds 1 percent. B. is at least 2 percent. C. exceeds 5 percent. D. is less than 1 percent. E. is greater than or equal to 1 percent.

Q: In calculating the net capital for a securities firms, which of the following is NOT an adjustment to the book value of net worth? A. The market value of net worth is calculated on a day-to-day basis. B. A series of adjustments are made to reflect unrealized profits and losses, subordinated liabilities, deferred taxes, options, and futures. C. The amount of securities that cannot be publicly sold are subtracted. D. All assets not readily converted into cash are subtracted. E. Haircuts to reflect potential market value fluctuations in asset values are deducted.

Q: Which approach used in calculating capital to cover operational risk allow banks to rely on internal data for the calculation of regulatory capital requirements? A. Standardized approach. B. Advanced measurement approach. C. Basic indicator approach. D. Internal ratings-based approach. E. All of the above.

Q: Calculation of the "add-on" to the risk-based capital ratio to measure operational risk A. may be done using the Basic Indicator Approach. B. may be done using the Standardized Approach. C. may be done using the Advanced Measurement Approach. D. All of the above. E. Answers A and B only.

Q: Calculation of the "add-on" to the risk-based capital ratio to measure market risk A. may be done using the Basic Indicator Approach. B. may be done using the standardized model proposed by regulators. C. may be done using the DI's own internal market risk model. D. Answers A and B only. E. Answers B and C only.

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

Q: How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)? A. 12. B. 18. C. 29. D. 32. E. 35.

Q: 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 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.

Q: The purpose of the countercyclical buffer proposed by Basel III is to A. expose those banks with inadequate capital to survive economic downturns. B. assist insolvent banks build capital during economic expansions. C. protect the banking system and reduce systematic exposures to economic downturns. D. enhance global movement of funds to those countries experiencing excess aggregate credit growth. E. force DIs to immediately adjust capital to meet the 2.5 percent level of buffer capital required.

Q: 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 A. Capital conservation buffer. B. Countercyclical buffer. C. Leverage buffer. D. Tier II buffer. E. CET1 capital buffer.

Q: The calculation of the risk-adjusted asset values of OBS market contracts A. nearly always equals zero because the exchange over which the contract initially traded assumes all of the risk. B. requires multiplication of the credit equivalent amounts by the appropriate risk weights. C. requires the calculation of a conversion factor to create credit equivalent amounts. D. All of the above. E. Answers B and C only.

Q: The current exposure component of the credit equivalent amount of OBS derivative items reflects A. the probability of an adverse price movement in contracts. B. the cost of replacing a contract if a counterparty defaults today. C. the probability today of a counterparty contract default in the future. D. the maximum price loss for any given position. E. future volatility of the underlying.

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Q: The potential exposure component of the credit equivalent amount of OBS derivative items reflects A. the probability of an adverse price movement in contracts. B. the cost of replacing a contract if a counterparty defaults today. C. the probability today of a counterparty contract default in the future. D. the maximum price loss for any given position. E. Answers A and D only.

Q: What is the minimum total capital (Tier I + Tier II) required to be adequately capitalized for the off-balance sheet derivative contracts (both interest rate swaps and foreign exchange forwards) under Basel II? A. $0.24 million.B. $0.36 million.C. $0.72 million.D. $0.60 million.E. $0.48 million.

Q: Counter party credit risk in OBS contracts 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.

Q: 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.

Q: The primary difference between Basel I and the proposed Basel III in converting OBS values to on-balance-sheet credit equivalent amounts is A. the use of credit ratings in Basel III to assign credit risk weights on the OBS activities. B. the use of six weight classes by Basel III rather than four classes. C. the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities. D. All of the above. E. Answers A and C only.

Q: The primary difference between Basel I and the proposed Basel III in calculating risk-adjusted assets is 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 the above. E. Answers A and C only.

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

Q: A criticism of the Basel I risk-based capital ratio is 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. Answers B and C only.

Q: Which of the following statements best describes the treatment of adjusting for credit risk of off-balance-sheet activities? A. All OBS activities are treated equally in making credit-risk adjustments. B. Standby letter of credit guarantees issued by banks to back commercial paper have a 50 percent conversion factor. C. The credit or default risk of over-the-counter contracts is approximately zero. D. The current exposure component of the credit equivalent amount of OBS derivative contracts reflects the credit risk if the contract counterparty defaults. E. The treatment of interest rate forward, option, and swap contracts differs from the treatment of contingent or guarantee contracts.

Q: Which of the following is not included in the Common Equity Tier I capital under Basel III? 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. E. Common shares issued by consolidated subsidiaries of the bank.

Q: Which of the following assets is deducted from Common Equity Tier I capital? A. Trademarks. B. Goodwill. C. Patents. D. Bank premises. E. None of the above.

Q: Which of the following is not a category of capital under Basel III? A. Tier III capital. B. Tier II capital. C. Common Equity Tier I. D. Total risk-based capital. E. Tier I capital.

Q: The bank is considering changing its asset mix by moving $100 million of commercial loans into Treasury securities. If it does change the asset mix and capital remains the same, the risk-based capital ratio A. will not change because the total assets have not changed. B. will decrease because the earnings rate on Treasuries is less than on loans. C. will increase by 16.67 percent. D. will increase because the assets will have less risk. E. will change, but the direction cannot be determined with the information given.

Q: The measurement of credit risk under the Basel II Accord allows banks to choose between 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 above. E. Answers A and C only.

Q: The Basel II Accord effective at year-end 2007 in the United States A. includes provisions covering minimum capital requirements for credit, market, and interest rate risk. B. stresses the regulatory supervisory process by requiring regulators to be more involved in evaluating the bank's specific risk profile and environment. C. requires only banks on the regulatory problem bank list to disclose publicly the degree and depth of problem issues as well as their capital adequacy. D. All of the above. E. Answers B and C only.

Q: The Basel I capital requirements as currently implemented include A. different credit risks of on-balance-sheet assets. B. different credit risks of off-balance-sheet assets. C. the consideration of market risk in 1998. D. All of the above. E. Only two of the above.

Q: The Basel capital requirements are based upon the premise that 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.

Q: The Basel capital requirements differ from previous capital standards in all except one of the following ways? A. More stringent capital standards for large banks than for small banks. B. Inclusion of off balance sheet assets in the asset base. C. Restrictions on the amount of goodwill that can be counted towards primary or Tier I capital. D. Risk weighting of assets on the basis of credit risk exposure. E. Risk weighting of off balance sheet contingencies.

Q: The concept of prompt corrective action refers to the requirement A. that bank managers must address problems in the loan portfolio when they are first identified. B. that regulators must take specific actions when bank capital levels fall outside the well-capitalized category. C. that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent. D. that b and c above are correct. E. that all of the above are correct.

Q: Bank regulators set minimum capital standards to A. inhibit rapid growth rate of bank assets. B. protect shareholders from managerial fraud or incompetence. C. protect creditors from decreases in asset values. D. force banks to follow socially desirable policies. E. make work for regulators.

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

Q: Which of the following is NOT a typical argument against market value accounting? A. Market value accounting introduces an unnecessary degree of variability into an FI's earnings. B. The use of market value accounting may reduce the willingness of FI's to invest in longer-term assets. C. FI's are increasingly trading, selling, and securitizing assets. D. Market value accounting is difficult to implement. E. Market value accounting may interfere with an FI's special functions as lenders and monitors of credit.

Q: Those regulatory agencies that have adopted some form of book value accounting standard to measure an FI's capital include all of the following except A. The Securities and Exchange Commission (SEC). B. The Federal Reserve. C. The Office of the Comptroller of the Currency (OCC). D. The FDIC. E. State regulatory agencies.

Q: Using a strict market value accounting might cause regulators to 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.

Q: During the financial crisis of 2008-2009, the FASB provided guidance on asset valuation that allowed A. DI management to use internal cash flow models and assumptions to estimate fair value when there is limited market data available. B. regulatory capital of banks to deviate from industry norms. C. excess reserves with the Fed to be included as regulatory capital. D. DIs to choose either book value treatment or market value treatment of asset valuation. E. DI management the option to postpone asset write-downs until adequate capital was available.

Q: Under historical accounting methods for the market value of capital, FIs 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 problems in the asset portfolio as they become known. E. invest in expensive computerized bookkeeping systems.

Q: The FASB set its guidelines to allow for the valuation of assets to be based on A. prices at the discretion of the DI's management. B. book values rather than market values. C. market values that existed when the assets were last marked to market. D. prices that would be received as part of a forced liquidation. E. prices that would be received in an orderly market.

Q: From a regulatory perspective, what is the impact on book value capital of a 25 basis point decrease in interest rates if the FI is holding a 20-year, fixed-rate, 11 percent annual coupon $100,000 par value bond? A. A decrease of $250. B. An increase of $250. C. An increase of $2,023. D. A decrease of $1,959. E. No impact on capital since the book value is unchanged.

Q: What is the impact on economic capital of a 25 basis point decrease in interest rates if the FI is holding a 20-year, fixed-rate, 11 percent annual coupon bond selling at a par value of $100,000? A. A decrease of $250.B. An increase of $250.C. An increase of $2,024.D. A decrease of $1,959.E. No impact on capital since the book value is unchanged.

Q: 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? A. $2.1 billion. B. $1.2 billion. C. $12.2 billion. D. $16.0 billion. E. $26.25 billion.

Q: Through August 2012, which of the following approximates the amount of funds paid back to the U.S. Treasury as part of the TARP Capital Purchase Program? A. $192 billion. B. $120 billion. C. $234 billion. D. $26 billion. E. $19 billion.