Question 1

Broker-dealers make very few adjustments to the book value net worth to reach an approximate market value net worth.

Accepted Answer

A) True 
 B)False

Question 2

All banks regardless of size are required to follow the same risk-weighting guidelines.

Accepted Answer

A) True 
 B)False

Question 3

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. 
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 4

In calculating the net capital for a securities firms, which of the following is NOT an adjustment to the book value of net worth?

Accepted Answer

A) Aggregate indebtedness 
B) Unrealized profits 
C) An adjustment for certain tax provisions 
D) Deferred tax provisions 
E) Unrealized losses 
A) Aggregate indebtedness 
B) Unrealized profits 
C) An adjustment for certain tax provisions 
D) Deferred tax provisions 
E) Unrealized losses

Question 5

Through August 2015, which of the following approximates the amount of funds paid back to the U.S.Treasury as part of the TARP Capital Purchase Program?

Accepted Answer

A) $192.1 billion. 
B) $120.0 billion. 
C) $236.5 billion. 
D) $26.9 billion. 
E) $19.6 billion. 
A) $192.1 billion. 
B) $120.0 billion. 
C) $236.5 billion. 
D) $26.9 billion. 
E) $19.6 billion.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The capital requirements for broker-dealers include a net worth market value to assets ratio of at least 2 percent.

Accepted Answer

A) True 
 B)False

Question 8

In the property-casualty insurance model, risk-based capital is a function of six different risk categories.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

A) Interest rate risk. 
B) Business risk. 
C) Asset risk. 
D) Foreign exchange risk. 
E) Insurance risk. 
A) Interest rate risk. 
B) Business risk. 
C) Asset risk. 
D) Foreign exchange risk. 
E) Insurance risk.

Question 12

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 are the total risk-weighted off-balance-sheet assets of the bank as defined under the Basel II standards?

Accepted Answer

A) $400 million. 
B) $16.5 million. 
C) $11.5 million. 
D) $13.5 million. 
E) $18.5 million. 
A) $400 million. 
B) $16.5 million. 
C) $11.5 million. 
D) $13.5 million. 
E) $18.5 million.

Question 13

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

Accepted Answer

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. 
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.

Question 14

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. $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \
\hline \begin{array} { l } 
\text { Municipal General } \
\text { Obligation Bonds }
\end{array} & \$ 60 & & \
\hline \begin{array} { l } 
\text { Residential Mortgages } \
\text { 1-4 family } \
\left( 80 \% { - 90\% } \text { LTV } \right)
\end{array} & \$ 100 & \begin{array} { l } 
\text { Perpetual Preferred } \
\text { Stock }
\end{array} & \$ 20 \
\hline \begin{array} { l } 
\text { Commercial loans } \
\text { BB + rated }
\end{array} & \$ 200 & \text { Equity } & \$10\
\hline \text { Total Assets } & \$ 400 & & \$ 400 \
\hline
\end{array}$$ 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 credit equivalent amount of the off-balance-sheet foreign exchange contracts if it is out-of-the-money by $4 million?

Accepted Answer

A) $1.0 million. 
B) $2.0 million. 
C) $5.0 million. 
D) $6.0 million. 
E) $9.0 million. 
A) $1.0 million. 
B) $2.0 million. 
C) $5.0 million. 
D) $6.0 million. 
E) $9.0 million.

Question 15

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk, but not interest rate risk and market risks.

Accepted Answer

A) True 
 B)False

Question 16

The calculation of the risk-weighted asset values of OBS market contracts

Accepted Answer

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 options. 
E) requires multiplication of the credit equivalent amounts by the appropriate risk weights and the calculation of a conversion factor to create credit equivalent amounts. 
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 options. 
E) requires multiplication of the credit equivalent amounts by the appropriate risk weights and the calculation of a conversion factor to create credit equivalent amounts.

Question 17

During the financial crisis of 2008-2009, the FASB provided guidance on asset valuation that allowed

Accepted Answer

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. 
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.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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. $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \
\hline \begin{array} { l } 
\text { Municipal General } \
\text { Obligation Bonds }
\end{array} & \$ 60 & & \
\hline \begin{array} { l } 
\text { Residential Mortgages } \
\text { 1-4 family } \
\left( 80 \% { - 90\% } \text { LTV } \right)
\end{array} & \$ 100 & \begin{array} { l } 
\text { Perpetual Preferred } \
\text { Stock }
\end{array} & \$ 20 \
\hline \begin{array} { l } 
\text { Commercial loans } \
\text { BB + rated }
\end{array} & \$ 200 & \text { Equity } & \$10\
\hline \text { Total Assets } & \$ 400 & & \$ 400 \
\hline
\end{array}$$ 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 required Tier I and Total risk-based capital for the on-balance-sheet assets in order for the DI to be adequately capitalized?

Accepted Answer

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. 
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.

Question 20

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. $$\begin{array} { | l | r | l | r | } 
\hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \
\hline \begin{array} { l } 
\text { Municipal General } \
\text { Obligation Bonds }
\end{array} & \$ 60 & & \
\hline \begin{array} { l } 
\text { Residential Mortgages } \
\text { 1-4 family } \
\left( 80 \% { - 90\% } \text { LTV } \right)
\end{array} & \$ 100 & \begin{array} { l } 
\text { Perpetual Preferred } \
\text { Stock }
\end{array} & \$ 20 \
\hline \begin{array} { l } 
\text { Commercial loans } \
\text { BB + rated }
\end{array} & \$ 200 & \text { Equity } & \$10\
\hline \text { Total Assets } & \$ 400 & & \$ 400 \
\hline
\end{array}$$ 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 credit equivalent amount of the off-balance-sheet interest rate swaps if it is in-the-money by $1 million?

Accepted Answer

A) $1.0 million. 
B) $2.0 million. 
C) $3.0 million. 
D) $4.0 million. 
E) $5.0 million. 
A) $1.0 million. 
B) $2.0 million. 
C) $3.0 million. 
D) $4.0 million. 
E) $5.0 million.

Exam 21: Capital Adequacy

Broker-dealers make very few adjustments to the book value net worth to reach an approximate market value net worth.

All banks regardless of size are required to follow the same risk-weighting guidelines.

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

In calculating the net capital for a securities firms, which of the following is NOT an adjustment to the book value of net worth?

Through August 2015, which of the following approximates the amount of funds paid back to the U.S.Treasury as part of the TARP Capital Purchase Program?

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

The capital requirements for broker-dealers include a net worth market value to assets ratio of at least 2 percent.

In the property-casualty insurance model, risk-based capital is a function of six different risk categories.

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.

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.

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?

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

A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and off-balance-sheet credit risk, but not interest rate risk and market risks.

The calculation of the risk-weighted asset values of OBS market contracts

During the financial crisis of 2008-2009, the FASB provided guidance on asset valuation that allowed

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

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters