Question 1

Discuss the rationale behind risk-based capital requirements.

Accepted Answer

Risk-based capital requirements are designed to ensure that financial institutions maintain enough capital to cover potential losses from their riskier activities. The rationale behind these requirements is to protect the stability of the financial system and prevent the need for government bailouts in the event of a crisis.

By tying capital requirements to the level of risk in a bank's assets, regulators can incentivize banks to hold more capital against riskier assets, such as loans to highly leveraged companies or investments in volatile markets. This helps to mitigate the potential impact of losses on the bank's solvency and reduces the likelihood of a bank failure.

Additionally, risk-based capital requirements can also promote a more efficient allocation of capital within the financial system. By requiring banks to hold more capital against riskier activities, these requirements can discourage excessive risk-taking and encourage banks to allocate their capital to more stable and productive uses.

Overall, risk-based capital requirements are intended to strike a balance between promoting financial stability and allowing banks to continue to provide credit and other financial services to the economy. By aligning capital requirements with the level of risk in a bank's activities, regulators can help to ensure that banks are better prepared to weather economic downturns and other adverse events, ultimately reducing the likelihood of systemic financial crises.

Question 2

What constitutes Tier 2 capital varies substantially between countries.

Accepted Answer

A) True 
 B)False  True

Question 3

Why do regulators prefer higher capital requirements?

Accepted Answer

A) It justifies the existence of regulatory agencies. 
B) It better protects the deposit insurance fund. 
C) It enhances bank asset quality. 
D) It decreases bank profitability. 
E) It increases bank leverage. 
A) It justifies the existence of regulatory agencies. 
B) It better protects the deposit insurance fund. 
C) It enhances bank asset quality. 
D) It decreases bank profitability. 
E) It increases bank leverage. B

Question 4

Use the following information for questions 
A bank currently just meets its total capital requirements of 8%.The bank currently has a dividend payout ratio of 35%.Assets are expected to grow at 5%.
-What is the required ROA to support the growth in assets?

Accepted Answer

A) 0.62% 
B) 0.65% 
C) 0.68% 
D) 0.72% 
E) 0.75% 
A) 0.62% 
B) 0.65% 
C) 0.68% 
D) 0.72% 
E) 0.75%

Question 5

-The minimum Tier 1 capital for this bank is:

Accepted Answer

A) $348 
B) $450 
C) $509 
D) $581 
E) $696 
A) $348 
B) $450 
C) $509 
D) $581 
E) $696

Question 6

Which of the following was not part of the Basle Agreement?

Accepted Answer

A) Bank's required capital was linked to its composition of assets. 
B) Banks are required to operate with a minimum level of equity. 
C) The ownership of equity by banks was prohibited. 
D) Capital requirements across countries were standardized. 
E) The minimum total capital requirements were set to 8% of risk-adjusted assets. 
A) Bank's required capital was linked to its composition of assets. 
B) Banks are required to operate with a minimum level of equity. 
C) The ownership of equity by banks was prohibited. 
D) Capital requirements across countries were standardized. 
E) The minimum total capital requirements were set to 8% of risk-adjusted assets.

Question 7

Decreasing capital increases risk by decreasing financial leverage.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a weakness of risk-based capital standards?

Accepted Answer

A) They ignore interest rate risk. 
B) They ignore the value of deposit insurance. 
C) They ignore changes in the market value of assets. 
D) They ignore credit risk. 
E) They ignore the value of a bank's charter. 
A) They ignore interest rate risk. 
B) They ignore the value of deposit insurance. 
C) They ignore changes in the market value of assets. 
D) They ignore credit risk. 
E) They ignore the value of a bank's charter.

Question 9

For a bank with deficient capital ratios, which of the following actions could be taken to increase the capital ratios, holding everything else the same?

Accepted Answer

A) Cut the bank's dividend payment. 
B) Increase the bank's burden. 
C) Repurchase the bank's common stock on the open market. 
D) Increase the bank's growth rate by making additional commercial loans. 
E) Reduce the bank's holdings of Treasury securities. 
A) Cut the bank's dividend payment. 
B) Increase the bank's burden. 
C) Repurchase the bank's common stock on the open market. 
D) Increase the bank's growth rate by making additional commercial loans. 
E) Reduce the bank's holdings of Treasury securities.

Question 10

Tier 2 capital consists of all of the following except:
a.30-year subordinated debt.
b.cumulative perpetual preferred stock.
c.mandatory convertible preferred stock.
d.preferred stock with a maturity of 7 years.
e.equity in subsidiaries.

Accepted Answer

The answer of Tier 2 capital consists of all of...

Question 11

Why do banks generally prefer lower capital requirements?

Accepted Answer

A) To minimize the impact shareholders have on management decisions. 
B) To increase the influence of bank regulators. 
C) To increase a bank's return on equity. 
D) To increase depositor protection. 
E) To maximize operating leverage. 
A) To minimize the impact shareholders have on management decisions. 
B) To increase the influence of bank regulators. 
C) To increase a bank's return on equity. 
D) To increase depositor protection. 
E) To maximize operating leverage.

Question 12

A significantly undercapitalized bank is one that does not meet the minimum levels for all three capital ratios.

Accepted Answer

A) True 
 B)False

Question 13

Use the following information for questions 
A bank currently just meets its total capital requirements of 8%.The bank currently has a dividend payout ratio of 35%.Assets are expected to grow at 5%.
-If the bank expects its ROA to be .45%, what is the maximum dividend payout ratio to support the increase in assets?

Accepted Answer

A) 11.1% 
B) 22.2% 
C) 33.3% 
D) 44.4% 
E) 89.9% 
A) 11.1% 
B) 22.2% 
C) 33.3% 
D) 44.4% 
E) 89.9%

Question 14

Why do smaller banks often have a more difficult time raising new capital compared to larger banks?

Accepted Answer

Smaller banks often face more challenges

Question 15

Under the current capital requirements, assets in Category 3, such as 1-4 family real estate loans, have an effective total capital-to-total-assets ratio of:

Accepted Answer

A) 1.6%. 
B) 2.0%. 
C) 4.0%. 
D) 8.0%. 
E) 8.6%. 
A) 1.6%. 
B) 2.0%. 
C) 4.0%. 
D) 8.0%. 
E) 8.6%.

Question 16

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?

Accepted Answer

A) Limit asset growth 
B) Shrink the bank 
C) Increase the dollar amount of commercial loans outstanding 
D) Shift more bank assets into lower risk categories. 
E) Reprice assets to reflect greater equity support 
A) Limit asset growth 
B) Shrink the bank 
C) Increase the dollar amount of commercial loans outstanding 
D) Shift more bank assets into lower risk categories. 
E) Reprice assets to reflect greater equity support

Question 17

Community banks are typically considered those banks with assets:

Accepted Answer

A) over $100 billion. 
B) between $50 billion and $99 billion. 
C) between $10 billion and $49 billion. 
D) between $1 billion and $9 billion. 
E) under $1 billion. 
A) over $100 billion. 
B) between $50 billion and $99 billion. 
C) between $10 billion and $49 billion. 
D) between $1 billion and $9 billion. 
E) under $1 billion.

Question 18

An adequately capitalized bank may obtain brokered deposits without FDIC approval.

Accepted Answer

A) True 
 B)False

Question 19

-What is the total amount of the bank's regulatory capital?

Accepted Answer

A) $500 
B) $700 
C) $750 
D) $1,000 
E) $1,300 
A) $500 
B) $700 
C) $750 
D) $1,000 
E) $1,300

Question 20

A bank that does not meet the minimum levels for Tier 1 capital, total capital, and leverage capital ratios is classified as:

Accepted Answer

A) well-capitalized. 
B) adequately capitalized. 
C) undercapitalized. 
D) significantly undercapitalized. 
E) critically undercapitalized. 
A) well-capitalized. 
B) adequately capitalized. 
C) undercapitalized. 
D) significantly undercapitalized. 
E) critically undercapitalized.

Discuss the rationale behind risk-based capital requirements.

What constitutes Tier 2 capital varies substantially between countries.

Why do regulators prefer higher capital requirements?

Use the following information for questions A bank currently just meets its total capital requirements of 8%.The bank currently has a dividend payout ratio of 35%.Assets are expected to grow at 5%. -What is the required ROA to support the growth in assets?

-The minimum Tier 1 capital for this bank is:

Which of the following was not part of the Basle Agreement?

Decreasing capital increases risk by decreasing financial leverage.

Which of the following is not a weakness of risk-based capital standards?

For a bank with deficient capital ratios, which of the following actions could be taken to increase the capital ratios, holding everything else the same?

Tier 2 capital consists of all of the following except: a.30-year subordinated debt. b.cumulative perpetual preferred stock. c.mandatory convertible preferred stock. d.preferred stock with a maturity of 7 years. e.equity in subsidiaries.

Why do banks generally prefer lower capital requirements?

A significantly undercapitalized bank is one that does not meet the minimum levels for all three capital ratios.

Why do smaller banks often have a more difficult time raising new capital compared to larger banks?

Under the current capital requirements, assets in Category 3, such as 1-4 family real estate loans, have an effective total capital-to-total-assets ratio of:

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?

Community banks are typically considered those banks with assets:

An adequately capitalized bank may obtain brokered deposits without FDIC approval.

-What is the total amount of the bank's regulatory capital?

A bank that does not meet the minimum levels for Tier 1 capital, total capital, and leverage capital ratios is classified as:

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Managing Interest Rate Risk: Economic Value of Equity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters

Exam 12: The Effective Use of Capital

Discuss the rationale behind risk-based capital requirements.

What constitutes Tier 2 capital varies substantially between countries.

Why do regulators prefer higher capital requirements?

Use the following information for questions A bank currently just meets its total capital requirements of 8%.The bank currently has a dividend payout ratio of 35%.Assets are expected to grow at 5%. -What is the required ROA to support the growth in assets?

-The minimum Tier 1 capital for this bank is:

Which of the following was not part of the Basle Agreement?

Decreasing capital increases risk by decreasing financial leverage.

Which of the following is not a weakness of risk-based capital standards?

For a bank with deficient capital ratios, which of the following actions could be taken to increase the capital ratios, holding everything else the same?

Tier 2 capital consists of all of the following except: a.30-year subordinated debt. b.cumulative perpetual preferred stock. c.mandatory convertible preferred stock. d.preferred stock with a maturity of 7 years. e.equity in subsidiaries.

Why do banks generally prefer lower capital requirements?

A significantly undercapitalized bank is one that does not meet the minimum levels for all three capital ratios.

Why do smaller banks often have a more difficult time raising new capital compared to larger banks?

Under the current capital requirements, assets in Category 3, such as 1-4 family real estate loans, have an effective total capital-to-total-assets ratio of:

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?

Community banks are typically considered those banks with assets:

An adequately capitalized bank may obtain brokered deposits without FDIC approval.

-What is the total amount of the bank's regulatory capital?

A bank that does not meet the minimum levels for Tier 1 capital, total capital, and leverage capital ratios is classified as:

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Managing Interest Rate Risk: Economic Value of Equity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters