Exam 21: Capital Adequacy

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.

Each of the following is a function of capital EXCEPT

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

Losses in asset values due to adverse changes in interest rates are borne initially by the

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.

Under Basel III, the risk-weighted 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.

Which of the following statements regarding leverage ratio framework are untrue?

Which approach used in calculating capital to cover operational risk allow banks to rely on internal data for the calculation of regulatory capital requirements?

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

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

A criticism of the Basel I risk-based capital ratio is

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

Under market value accounting methods, FIs

Which of the following assets is deducted from Common Equity Tier I capital?

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

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.

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

The primary difference between Basel I and the proposed Basel III in calculating risk-weighted assets is

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

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