Question 1

Broker-dealers must ensure that aggregated indebtedness is not less than

Accepted Answer

A) 15 times larger than liquid assets. 
B) 15 times larger than equity. 
C) 25 percent of net worth. 
D) 2 percent of equity. 
E) 8 percent of equity. 
A) 15 times larger than liquid assets. 
B) 15 times larger than equity. 
C) 25 percent of net worth. 
D) 2 percent of equity. 
E) 8 percent of equity.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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, respectively, the credit equivalent value of the letters of credit, interest rate swaps, and FX contracts?

Accepted Answer

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. 
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.

Question 6

In the life insurance model, the ratio of total surplus and capital to the risk-based capital calculation must be greater than or equal to 1.0 for the insurance company to be satisfactorily capitalized.

Accepted Answer

A) True 
 B)False

Question 7

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 8

The risk-based capital model in the life insurance industry includes asset risk, business risk, insurance risk, and interest rate risk.

Accepted Answer

A) True 
 B)False

Question 9

Basel III guidelines for determining risk-weighted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

Accepted Answer

A) True 
 B)False

Question 10

The FASB set its guidelines to allow for the valuation of assets to be based on

Accepted Answer

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. 
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.

Question 11

Under Basel III, OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-weighted asset values.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

Calculation of the "add-on" to the risk-based capital ratio to measure operational risk

Accepted Answer

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 options. 
E) may be done using the Basic Indicator Approach and the Standardized Approach. 
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 options. 
E) may be done using the Basic Indicator Approach and the Standardized Approach.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)?

Accepted Answer

A) 12. 
B) 18. 
C) 30. 
D) 36. 
E) 45. 
A) 12. 
B) 18. 
C) 30. 
D) 36. 
E) 45.

Question 16

Bank regulators set minimum capital standards to

Accepted Answer

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. 
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.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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. 
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.

Question 19

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?

Accepted Answer

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. 
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.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 21: Capital Adequacy

Broker-dealers must ensure that aggregated indebtedness is not less than

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

Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.

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

In the life insurance model, the ratio of total surplus and capital to the risk-based capital calculation must be greater than or equal to 1.0 for the insurance company to be satisfactorily capitalized.

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

The risk-based capital model in the life insurance industry includes asset risk, business risk, insurance risk, and interest rate risk.

Basel III guidelines for determining risk-weighted on-balance-sheet assets relies more heavily on credit agency ratings than did Basel I.

The FASB set its guidelines to allow for the valuation of assets to be based on

Under Basel III, OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-weighted asset values.

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

Calculation of the "add-on" to the risk-based capital ratio to measure operational risk

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

How many institutions are currently listed as Global Systematically Important Banks (G-SIBs)?

Bank regulators set minimum capital standards to

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

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

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?

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

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