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 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. 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.

A property-casualty (P-C) insurance firm has estimated the following risk-based capital charge for its individual risk classes: $\begin{array}{|c|c|c|} \hline \text { Risk } & \text { Description } & \text { RBC Charge } \\ \hline \text { R0 } & \text { Affiliated P-C } & \$ 6.0 \text { million } \\ \hline \text { R1 } & \text { Fixed-income assets } & \$ 2.0 \text { million } \\ \hline \text { R2 } & \text { Common Stock } & \$ 1.0 \text { million } \\ \hline \text { R3 } & \text { Reinsurance } & \$ 3.0 \text { million } \\ \hline \text { R4 } & \text { Loss Adjustment Expense } & \$ 1.0 \text { million } \\ \hline \text { R5 } & \text { Written Premiums } & \$ 2.0 \text { million } \\ \hline \text { R6 } & \text { Hurricane } & \$ 1.0 \text { million } \\ \hline \text { R7 } & \text { Earthquake } & \$ 0.5 \text { million } \\ \hline \text { Total } & & \$ 16.50 \text { million } \\ \hline \end{array}$ 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) $10.50 million. D) $12.50 million. E) $15.00 million. A) $4.36 million. B) $10.00 million. C) $10.50 million. D) $12.50 million. E) $15.00 million.

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 is the amount of risk weighted 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. A) $130.0 million. B) $685.0 million. C) $720.0 million. D) $630.0 million. E) $900.0 million.

Exam 21: Capital Adequacy

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

(True/False)

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(31)

Question 41

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

(True/False)

4.9/5

(37)

Question 42

Using a strict market value accounting might cause regulators to

(Multiple Choice)

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(33)

Question 43

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

(True/False)

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Question 44

The Basel I capital requirements as currently implemented include

(Multiple Choice)

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Question 45

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.

(True/False)

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(30)

Question 46

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. Cash \ 80 Deposits \ 550 Municipal General Obligation Bonds \ 100 Residential Mortgages 1-4 family (LTV 60\%-80\%) \ 220 Long-Term Debt \ 290 Commercial loans \ 500 Equity \ 60 Total Assets \ 900 \ 900 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?

(Multiple Choice)

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(34)

Question 47

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.

(True/False)

4.9/5

(34)

Question 48

The potential exposure component of the credit equivalent amount of OBS derivative items reflects

(Multiple Choice)

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Question 49

In the life insurance model, morbidity risk differs from mortality risk by the circumstances surrounding the actual death event.

(True/False)

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Question 50

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

(Multiple Choice)

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Question 51

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

(True/False)

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Question 52

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.

(True/False)

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(40)

Question 53

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

(True/False)

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Question 54

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

(Multiple Choice)

4.8/5

(34)

Question 55

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

(True/False)

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Question 56

The risk-weighted assets represent the denominator of the risk-based capital ratios

(True/False)

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Question 57

A property-casualty (P-C) insurance firm has estimated the following risk-based capital charge for its individual risk classes: Risk Description RBC Charge R0 Affiliated P-C \ 6.0 million R1 Fixed-income assets \ 2.0 million R2 Common Stock \ 1.0 million R3 Reinsurance \ 3.0 million R4 Loss Adjustment Expense \ 1.0 million R5 Written Premiums \ 2.0 million R6 Hurricane \ 1.0 million R7 Earthquake \ 0.5 million Total \ 16.50 million 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?

(Multiple Choice)

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Question 58

Through August 2015, 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?

(Multiple Choice)

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Question 59

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. Cash \ 80 Deposits \ 550 Municipal General Obligation Bonds \ 100 Residential Mortgages 1-4 family (LTV 60\%-80\%) \ 220 Long-Term Debt \ 290 Commercial loans \ 500 Equity \ 60 Total Assets \ 900 \ 900 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 weighted on-balance-sheet assets of the bank as defined under the Basel II standards?

(Multiple Choice)

4.7/5

(41)

Question 60

Exam 21: Capital Adequacy

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

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

Using a strict market value accounting might cause regulators to

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

The Basel I capital requirements as currently implemented include

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.

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.

The potential exposure component of the credit equivalent amount of OBS derivative items reflects

In the life insurance model, morbidity risk differs from mortality risk by the circumstances surrounding the actual death event.

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

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

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.

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

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

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

The risk-weighted assets represent the denominator of the risk-based capital ratios

Through August 2015, 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?

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