Exam 20: Capital Adequacy

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

As compared to Basel I, the standardized approach of Basel III is designed to produce capital ratios that are more in line with the actual economic risks that the DTIs are facing.

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:

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

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

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

It is likely that the discrepancy between book value of equity and market value of equity will increase as volatility in interest rates increases.

Basel III capital ratios will become fully effective for Canadian banks in 2016.

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.

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

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.

Which of the following statements best describes the treatment of adjusting for credit risk of off-balance-sheet activities?

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

What is the impact on economic capital of a 25 basis point decrease in interest rates if the FI is holding a year, fixed-rate, 11 percent annual coupon bond selling at a par value of $100,000?

Because of different tax, accounting, and safety-net rules and the application of the new Basel III rules to different industries, a level playing field across banks in different countries will not occur.

The Basic Indicator Approach in calculating capital to cover operational risk requires banks to hold 12 percent of total assets in capital to cover operational risk exposure.

In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent guarantee contracts, the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.

The Asset to Capital Multiple does not account for the risks of off-balance- sheet activities.

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 year, fixed-rate, 11 percent annual coupon $100,000 par value bond?

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