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Exam 20: Capital Adequacy

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Question 51

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The leverage ratio specified under FDICIA does not account for the risks of off-balance-sheet activities.

A) True
B) False

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Question 52

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

A) True
B) False

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Question 53

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If the value of equity is less than zero on a mark-to-market accounting basis, liquidation of the FI would result in losses to the shareholders.

An FI may be insolvent in market value terms even if the book value of equity is positive.

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

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

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

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

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.

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?

Using a strict market value accounting might cause regulators to

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

Under Generally Accepted Accounting Principles, FIs have flexible rules in recognizing the amount and timing of loan losses.

Through August 2012, 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?

Failure to meet the capital conservations buffer and the countercyclical buffer guidelines instituted under Basel III will result in limits to all of the following except

The risk-based capital requirements have received several types of criticism. Please match the criticism headings below (as stated in the text) with the appropriate criticism.

Determining risk-adjusted asset values for OBS market contracts requires multiplying the notional values by the appropriate risk weights.

Counter party credit risk in OBS contracts

Sigma Bank has the following balance sheet in millions of dollars. Unless mentioned otherwise, all assets are associated with corporate customers (not governments or sovereigns) . Values are in millions of dollars. Refer to table 20-8 for appropriate risk weights $\begin{array} { | l | r | l | r | } \hline \text { Cash } & \$ 40 & \text { Deposits } & \$ 370 \\\hline \begin{array} { l } \text { Municipal General } \\\text { Obligation Bonds }\end{array} & \$ 60 & & \\\hline \begin{array} { l } \text { Residential Mortgages } \\\text { l-4 family } \\( 80 \% - 90 \% \text { LTV) }\end{array} & \$ 100 & \begin{array} { l } \text { Perpetual Preferred } \\\text { Stock }\end{array} & \$ 20 \\\hline \begin{array} { l } \text { Commercial loans } \\\text { BB + rated }\end{array} & \$ 200 & \text { Equity } & \$ 10 \\\hline \text { Total Assets } & \$ 400 & & \$ 400 \\\hline\end{array}$ Off balance sheet contingent liabilities (Refer to Table 20-10) $40 million direct-credit substitute standby letters of credit issued to a U.S. corporation. $40 million commercial letters of credit issued to a corporation Off-balance sheet derivatives (Refer to Table 20-11) $200 million 10-year interest rate swaps $100 million 2-year forward DM contracts -What is the credit equivalent amount of the off-balance-sheet letters of credit, both standby and commercial?

Book value accounting systems recognize the impact of interest rate problems sooner than credit risk problems.