lOMoAR cPSD| 48302938
1 . Banks with greater capital can do all of the following except :
a. borrow at lower rates. b. make larger loans.
c. expand faster through acquisitions.
d. expand faster through internal growth
e. Banks with greater capital can do all of the above.
2. Prior to the Basel Agreement, capital requirements were established without regard to:
a. the bank's liquidity risk.
b. the bank's asset quality.
c. the size of the bank's assets.
d. the bank's operational risk.
e. the bank's interest rate risk.
3 . Which of the following is not part of Tier 1 or core capital?
a. minority interests in equity capital of consolidated subsidiaries.
b. common stockholders equity
c. cumulative perpetual preferred stock.
d. noncumulative perpetual preferred stock.
e. All of the above are part of Tier 1 or core capital..
4 . Supplementary or Tier 2 capital does not include :
a. hybrid capital instruments
b. intermediate-term preferred stock
c. cumulative perpetual preferred stock
d. long-term preferred stock
e. noncumulative perpetual preferred stock
5 . Which of the following was not part of the Basel Agreement?
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.
6. Under the current capital requirements, assets in Category 2, such as repurchase agreements,
have an effective total capital-to-total-assets ratio of: a. 1.6%. c. 4.0%. e. 8.6%. b. 2.0%. d. 8.0%.
7. 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: a. 1.6%. c. 4.0%. e. 8.6%. lOMoAR cPSD| 48302938 b. 2.0%. d. 8.0%.
8. Under current capital requirements, Tier 1 Capital takes of all of the following into account except:
a. common stockholder's equity.
b. equity in subsidiaries. c. goodwill.
d. allowance for loan and lease losses.
e. noncumulative perpetual preferred stock.
9 . 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.
10 . How much Tier 1 capital does the bank have? a. $100 c. $450 e. $950 b. $400 d. $750
Tier 1 Capital = Common Stock +Common Stock Surplus + Retained Earnings
Tier 1 Capital = $100 + $300 + $350 = $750
11 . How much Tier 2 capital does the bank have? a. $200 c. $550 e. $1100 b. $450 d. $800
Tier 2 Capital = Subordinated Debt + Cumulative Preferred Stock + Allowance for Loan Loss
Tier 2 Capital = $250 + $200 + $350 = $800
12 . The tangible common equity (TCE) ratio for this bank is : a. 4.00% c. 5.00% e. 5.39% b. 4.04% d. 5.05%
TCE = (Common Stockholders Equity - Intangible Assets)/(Total Assets - Intangible Assets)
TCE = ($750 - $150)/($15,000 - $150) = 4.04% 13
. The minimum Tier 1 capital for this bank is : a. $348 c. $509 e. $696 b. $450 d. $581
Minimum Tier 1 Capital = 4% Risk-Adjusted Assets = 4% $8,700 = $348
14 . The minimum total capital for this bank is : a. $348 b. $450 c. $509 d. $581 e. $696 2 lOMoAR cPSD| 48302938
Minimum Total Capital = 8% Risk-Adjusted Assets = 8% $8,700 = $696
15. Which of the following is included in regulatory capital but not accounting capital? a.
Capital reserve for contingencies b. Preferred stock c. Subordinated debt d. Surplus
e. All of the above are included in both regulatory and accounting capital
16. When the final Basel III rules are implemented in 2019, the minimum Tier 1
capital/riskweighted assets percentage will be: a. 4% c. 8% e. 10.5% b. 6% d. 8.5%
17. To be considered well-capitalized, a bank's minimum Tier 1 capital, total capital, and leverage capital must be:
a. 4%, 8%, and 3%, respectively.
b. 8%, 5%, and 3%, respectively.
c. 10%, 10%, and 10%, respectively.
d. 6%, 10%, and 5%, respectively.
e. 3%, 4%, and 8%, respectively.
18. To be considered adequately capitalized, a bank's minimum Tier 1 capital, total capital, and
leverage capital must be:
a. 4%, 8%, and 3%, respectively.
b. 8%, 5%, and 3%, respectively.
c. 10%, 10%, and 10%, respectively.
d. 6%, 10%, and 5%, respectively.
e. 3%, 4%, and 8%, respectively.
19. A bank that does not meet the minimum levels for Tier 1 capital, total capital, and leverage
capital ratios is classified as: a. well-capitalized.
b. adequately capitalized. c. undercapitalized.
d. significantly undercapitalized.
e. critically undercapitalized.
20 . How does bank capital reduce bank risk?
a. It provides a cushion for firms to absorb losses.
b. It creates unlimited growth opportunities.
c. It limits access to the financial markets.
d. All of the above. lOMoAR cPSD| 48302938 e. a. and b.
21 . Why do regulators prefer higher capital requirements?
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.
22 . Why do banks generally prefer lower capital requirements?
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.
23 . How do capital requirements constrain bank growth?
a. By discouraging investments in Treasury securities.
b. By disallowing the ownership of mortgage loans.
c. By decreasing a bank's net interest margin.
d. By limiting the amount of new assets that a bank can acquire through debt financing.
e. By reducing a bank's CAMELS ratings.
24. Which of the following is not a weakness of risk-based capital standards? 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.
25. Approximately what percentage of commercial banks were currently considered well
capitalized at the end of 2007? a. 94% c. 74% e. 54% b. 84% d. 64%
26 . What is the required ROA to support the growth in assets? a. 0.62% c. 0.68% e. 0.75% b. 0.65% d. 0.72%
0.05 = [ROA*(1-0.35) + 0]/0.08 0.05*0.08 = 0.65 *ROA 0.004/0.65 = ROA ROA = 0.00615 4 lOMoAR cPSD| 48302938
27. If the bank expects its ROA to be 0.45%, what is the maximum dividend payout ratio to support
the increase in assets? a. 11.1% c. 33.3% e. 89.9% b. 22.2% d. 44.4%
0.05 = [0.0045*(1-DR) + 0]/0.08 0.004 = 0.0045*(1-DR) 0.8888 = 1- DR DR = .1111 = 11.11%
28. If the bank expects its ROA to be .45% and the bank does not wish to change its dividend
payout ratio from 35%, how much new equity capital (as a percent of total assets) must the bank
issue to support the growth in assets?
a. 0.2925% c. 0.1075% e. 1.367% b. 2.935% d. 1.075%
0.05 = [0.0045*(1-0.35) + ΔEC/TA ]/0.08
0.05 *0.08= [0.002925 + ΔEC/TA ] 0.004 - 0.002925 = ΔEC/TA ΔEC/TA = 0.001075
29. For banks that have insufficient capital, which of the following is not a typical operating
strategy to achieve capital adequacy? 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
30. Which of the following is true regarding subordinated debt?
a. Subordinated debt claims come before the claims of depositors.
b. Principal payments are not mandatory.
c. Transaction costs on issuing new debt are lower than when issuing new equity.
d. Interest payments on subordinated debt are tax-deductible.
e. New subordinated debt dilutes existing shareholder equity.
31 . Which of the following is not true regarding common stock?
a. Common stock has no maturity.
b. New issues of common stock may dilute existing shareholder equity.
c. Common stock is a permanent source of funds.
d. Dividends paid are not tax-deductible.
e. Dividends are considered a fixed charge that must be paid.
32. Which of the following is a hybrid form of equity that effectively pays dividends that are tax
deductible and is considered Tier 1 capital? a. Common stock b. Preferred stock lOMoAR cPSD| 48302938
c. Trust preferred stock d. Leases
e. Trust subordinated debt
33. 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? 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.
34. Which of the following is not a Category 1 (Risk Rate = 0%) balance sheet asset? a. Currency in transit.
b. U.S. Treasury securities.
c. Cash items in the process of collection.
d. Claims unconditionally guaranteed by the U.S. government.
e. All of the above are Category 1 (Risk Rate = 0%) assets.
35. Which of the following is false regarding bank preferred stock?
a. Preferred stock investor claims are senior to those of common stockholders.
b. All preferred stock investors pay taxes on only 20% of dividends.
c. Most preferred stock issues are adjustable-rate perpetual stock.
d. Preferred stock has the same disadvantages as common stock.
e. None of the statements is false. 1. what is capital
Funds contributed by the owners of a financial institution -has become the centerpiece of supervision and regulation today
2. Why is capital so important in financial-services management?
It provides a cushion of protection against risk and promotes public confidence
3. Tasks Capital Performs 1.
Provides a cushion against the risk of failure 2.
Provides funds to help institutions get started 3.
Promotes public confidence 4.
Provides funds for growth 5. Regulator of growth 6.
Regulatory tool to limit risk exposure
4. Key Risks in Banking & Financial Institutions' Management ▫Credit Risk ▫Liquidity Risk
▫Interest Rate Risk 6 lOMoAR cPSD| 48302938 ▫Operational Risk ▫Exchange Risk ▫Crime Risk
5. Defenses against Risks ▫Quality Management ▫Diversification ▫Geographic ▫Portfolio ▫Deposit Insurance ▫Owners' Capital
6. Types of Capital in Use 1. Common stock 2. Preferred stock 3.
Surplus (excess amount above par value ) 4.
Undivided profits (RE ) 5.
Equity reserves (funds set aside for contingencies ) 6.
Subordinated debentures (convertible LTD capital ) 7.
Minority interest in consolidated subsidiaries 8.
Equity commitment notes (debt securities repayable from the sale of stock)
7. Reasons for Capital Regulation 1.
To limit risk of failures 2.
To preserve public confidence 3.
To limit losses to the government and other institutions arising from deposit insurance claims 8. Research Evidence
▫Research has been conducted on the issue of whether the private marketplace or government regulatory
agencies exert a bigger effect on bank risk taking
▫Most studies find that the private marketplace is probably more important than government regulation in the long run
▫Recently government regulation appears to have become nearly as important as the private marketplace
Especially in the wake of the great credit crisis of 2007-2009
▫Some of the most pertinent information needed to assess a bank's risk exposure is known only to government regulators
▫Research has found that increased capital does not materially lower a bank's failure risk ... 9. The Basel Agreement
▫An international agreement on new capital standards
▫Designed to keep their capital positions strong lOMoAR cPSD| 48302938
▫Reduce inequalities in capital requirements among different countries
▫Promote fair competition
▫Catch up with recent changes in financial services and financial innovation
▫ In particular, the expansion of off-balance-sheet commitments
▫Formally approved in July 1988 10. Basel I
▫The original Basel capital standards are known today as Basel I ▫Various
sources of capital were divided into two tiers:
11. Basel Tier 1:(core) capital
▫ Common stock and surplus,
▫ undivided profits (retained earnings),
▫ qualifying noncumulative perpetual preferred stock,
▫ minority interest in the equity accounts of consolidated subsidiaries,
▫ selected identifiable intangible assets less goodwill and other intangible assets
12. Tier 2 (supplemental) capital
▫ Allowance (reserves) for loan and lease losses,
▫ subordinated debt capital instruments,
▫ mandatory convertible debt,
▫ intermediate-term preferred stock,
▫ cumulative perpetual preferred stock with unpaid dividends,
▫ equity notes and other long-term capital instruments that combine both debt and equity features
13. (BASEL 1) In order for a bank to qualify as adequately capitalized, it must have: 1.
A ratio of core capital (Tier 1) to total risk-weighted assets of at least 4 percent 2.
A ratio of total capital (the sum of Tier 1 and Tier 2 capital) to total risk-weighted assets
of at least 8 percent, with the amount of Tier 2 capital limited to 100 % of Tier 1 capital
14. Calculating Risk-Weighted Assets
▫Each asset item on a bank's balance sheet and each off-balance- sheet commitment it has made are
multiplied by a risk-weighting factor Designed to reflect its credit risk exposure
▫The most closely watched off-balance-sheet items are standby letters of credit and long-term, legally
binding credit commitments
To compute this bank's risk-weighted assets: 1.
Compute the credit-equivalent amount of each off-balance-sheet (OBS) item 2.
Multiply each balance sheet item and the credit-equivalent amount of each OBS item by its risk weight
15. Capital Requirements Attached to Derivatives
▫The Basel I capital standards were adjusted to take account of the risk exposure banks may face from derivatives 8 lOMoAR cPSD| 48302938
▫Futures, options, swaps, interest rate cap and floor contracts, and other instruments
▫Sometimes expose a bank to counterparty risk
▫ The danger that a customer will fail to pay or to perform,
▫ forcing the bank to find a replacement contract with another party that may be less satisfactory ...
16. Bank Capital Standards and Market Risk
▫Basel I failed to account for market risk
▫The losses a bank may suffer due to adverse changes in interest rates, security prices, and currency and commodity prices
▫The risk weights on bank assets were designed primarily to take account of credit risk (not market risk) ...
17. In an effort to deal with these and other forms of market risk, in 1996 the Basel Committee
approved a modification to the rules
▫Permitted the largest banks to conduct risk measurement and estimate the amount of capital necessary to cover market risk
▫Led to a third capital ratio (Tier 3) ...
18. Value at Risk (VaR) Models Responding to Market Risk
▫A statistical framework for measuring a bank portfolio's exposure to changes in market prices or market
rates over a given time period, subject to a given probability.
19. Limitations and Challenges of VaR and Internal Modeling
VaR estimates and internal modeling are not perfect
▫ Inaccurate VaR estimates can expose a bank to excessive risk so that its capital position may turn out
not to be large enough to cover actual losses the bank faces
▫ The portfolios of the largest banks are so complex with thousands of risk factors that it may be
impossible to consistently forecast VaRs accurately
▫Promote "backtesting" 20. Basel 2
▫Bankers found ways around many of Basel I's restrictions ▫Capital arbitrage
▫ Instead of making banks less risky, parts of Basel I seemed to encourage banks to become more risky
▫Basel I represented a "one size fits all" approach to capital regulation
▫ It failed to recognize that no two banks are alike in terms of their risk profiles
21. Basel II set up a system in which capital requirements would be more sensitive to risk and
protect against more types of risk than Basel I
▫Basel II would be gradually phased in for the largest international banks ...
22. Pillars of Basel II lOMoAR cPSD| 48302938 1.
Minimum capital requirements for each bank based on its own estimated risk exposure
from credit, market, and operational risks 2.
Supervisory review of each bank's risk-assessment procedures and the adequacy of its
capital to ensure they are "reasonable" 3.
Greater public disclosure of each bank's true financial condition so that market discipline
could become a more powerful force compelling excessively risky banks to lower their risk exposure
23 . Credit risk models
▫Computer algorithms that attempt to measure a lender's exposure to default
▫ by its borrowing customers or to credit downgradings
24. Most credit risk models develop estimates based upon : ▫Borrower credit ratings
▫The probability those credit ratings will change
▫The probable amount of recovery should some loans default
▫The possibility of changing interest-rate spreads between riskier and less risky loans
25. Basel II and Credit Risk Models
▫Under Basel I, minimum capital requirements remained the same for most types of loans regardless of credit rating
▫Under Basel II, minimum capital requirements were designed to vary significantly with credit quality
26. A Dual (Large-Bank, Small-Bank) Set of Rules
▫Basel II was designed to operate under one set of capital rules for the handful of largest multinational
banks and another set for more numerous smaller banking firms
▫Regulators were concerned that smaller banks could be overwhelmed by:
▫The heavy burdens of gathering risk-exposure information
▫Performing complicated risk calculations
▫Basel II anticipated that smaller institutions would be able to
▫continue to use simpler approaches in determining their capital requirements and risk exposures,
paralleling Basel I rules ...
27. Problems Accompanying the Implementation of Basel II
▫Some forms of risk had no generally accepted measurement scale
▫ Operational Risk
Most banks are more likely to face risk exposure in the middle of an economic recession than they will
in a period of economic expansion
▫ For example, the Global credit crisis of 2007-2009
28. Basel III: Another Major Regulatory Step Underway, Born in Global Crisis
Basel II was never fully implemented
▫Had to move toward Basel III in order to prevent future crises Key issue in Basel III 10 lOMoAR cPSD| 48302938
▫Determining the volume and mix of capital the world's leading banks should maintain if their troubled
assets generate massive losses
Capital requirements laid down in Basel I and II apparently were inadequate in the face of the latest credit crash
▫Bankers found ways to hold both less capital in total and a weaker mix of kinds of capital 29 . Basel III
Proponents of Basel III called for greater total capitalization, stronger definition of what belongs in banks'
capital accounts covers the capital, liquidity, and debt positions of individual international banks and also
broader issues associated with global business cycles and systemic risks.
30. U.S. bank regulators created capital-adequacy categories for implementing PCA(Prompt Corrective Action) 1. Well capitalized 2. Adequately capitalized 3. Undercapitalized 4.
Significantly undercapitalized 5.
Critically undercapitalized 31 . Raising Capital Internally ▫Dividend Policy
▫The board of directors and management must agree on the appropriate retention ratio and dividend payout ratio
32 . Raising Capital Externally
▫If a financial firm does need to raise capital from outside sources, it has several options:
1. Selling common stock
2. Selling preferred stock
3. Issuing debt capital 4. Selling assets 5. Leasing facilities LƯU Ý
6. Swapping stock for debt securities
1. Xem lại các khái niệm được giới thiệu trong từng chương. Làm lại các bài tập đã làm trên lớp hoặc trong các bài
kiểm tra. Đọc lại các slide và ghi chép trên lớp của môn học.
2. Xem lại vai trò của Board of directors, Supervisory Board trong việc đưa ra các chính sách của ngân hàng
3. Xem lại mô hình ngân hàng (C1): Small bank, Wholesale bank, Financial Holding Companies, bank holding company…
4. Học thuộc kết cấu và các khoản mục của 2 bảng: Balance sheet (Report of Condition), Statement of income (Report
of Income) -> cái này buộc phải nhớ chứ k có cách nào khác cả, trình tự của các khoản mục sắp xếp theo nguyên lý nào…
5. Công thức tính ROE, NIM và phân tích phân rã của ROE, NIM -> sự ảnh hưởng của các yếu tố lên các hệ số này.
Làm lại bài tập trên lớp về phần này. lOMoAR cPSD| 48302938
6. Các định nghĩa của các khoản nợ như: Credit risk, criticized loan, Scheduled loan, Doubtful loan, Loss loan,
Substandard loans… Dấu hiệu của khoản nợ có vấn đề (Warning Signs of Problem Loans). Nội dung chính sách
tín dụng (Written loan policy), Giám sát tín dụng (Loan Review) và xử lý/thanh lý khoản tín dụng (Loan Workout).
7. Xem lại Strategies for Liquidity Managers (Asset Liquidity Management or Asset Conversion Strategy, Borrowed
Liquidity or Liability Management Strategy, Balanced Liquidity Strategy), source of liquidity, bài tập tính toán về
Net Liquidity Position, Total Liquidity Requirement
8. Về phiên bản của Basel agreement: Basel I và Basel 2 (Chương 5) và một số lưu ý nhỏ với 2 cái này: Basel 1 was
failed to deal with market risk. In the U.S. larger banks can create their own in-house models to measure their
market risk exposure, var, to determine the maximum amount a bank might lose over a specific period. Pillars of
Basel II: 1. Minimum capital requirements for each bank based on its own estimated risk exposure from credit,
market, and operational risks; 2. Supervisory review of each bank's risk-assessment procedures and the adequacy
of its capital to ensure they are "reasonable"; 3. Greater public disclosure of each bank's true financial condition so
that market discipline could become a more powerful force compelling excessively risky banks to lower their risk exposure
9. Công thức tính vốn cấp 1 và cấp 2 (Tier I, Tier II): các phần tính vào và các phần loại trừ trong vốn đó. Công thức
tính CAR (Ratio of Core Capital (Tier 1) và Ratio of Total Capital (Tier 1 and Tier 2). Làm lại bài tập trên lớp về
phần này nếu chưa quen cách làm.
10. Công thức tính IS Gap và Duration Gap. Xem xét sự thay đổi của chúng khi lãi suất tăng, giảm và tác động của chúng đến NII
11. Những lưu ý cần nghiên cứu thêm trong các slide tự nghiên cứu/chưa kịp trình bày trên lớp: slide 49 chương 5 về
ICGR ratio (Internal Capital Growth Rate), trong quizlet giảng viên gửi có bài ví dụ về cái đó, bạn có thể tham khảo;
Xem các phần tự học, tự nghiên cứu của nhóm đối với securitizing loans, interest rate swaps -> lưu ý mấy ý chung
chung về vai trò và lợi ích của các sản phẩm phái sinh này. 12 lOMoAR cPSD| 48302938
1. Customers purchasing non deposit investment accounts sold by a bank operating in the united
states must be told in writing: all of the above
2. A trust departments activities often center around establishing:
a fiduciary relationship with the customer
3. A bank would offer insurance services in addition to traditional banking services if it believed
in the potential the benefits of: Economics of SCOPE
4. which of the following is an example of a non deposit investment product of the bank?
Proprietary mutual fund
5. which of the following trust agreements allows wealth to be passed free of gift and estate tax to heirs? IRRevocable Trust
6. which of the following trust agreements allows the bank trust officer to act on behalf of a living customer? revocable trust
7. which of the following trust agreements is used to back the issue of securities by a corpoation? 1 indenture trusts
8. A bank is considering adding life insurance underwriting to the services it offers. It has
estimated that the expected return and standard deviation of its traditional services are 12
percent and 6 percent respectively. It has also estimated that the expected return and standard
deviation of its new underwriting services are 18 percent and 10 percent respectively. The
correlation between these services has been estimated to be +.10 and the bank estimates that
90 percent of its business will be from traditional services and 10 percent from the new
underwriting services. What is the expected return of the new combination of services? 12.60 %
9. A bank is considering adding life insurance underwriting to the services it offers. It has
estimated that the expected return and standard deviation of its traditional services are 12
percent and 6 percent respectively. It has also estimated that the expected return and standard
deviation of its new underwriting services are 18 percent and 10 percent respectively. The
correlation between these services has been estimated to be +.10 and the bank estimates that
90 percent of its business will be from traditional services and 10 percent from the new
underwriting services. What is the expected STANDARD DEVIATION of the new combination of services? 5.59 %
10. A bank is considering adding life insurance underwriting to the services it offers. It has
estimated that the expected return and standard deviation of its traditional services are 12
percent and 6 percent respectively. It has also estimated that the expected return and standard
deviation of its new underwriting services are 18 percent and 10 percent respectively. The
correlation between these services has been estimated to be +.10 and the bank estimates that
90 percent of its business will be from traditional services and 10 percent from the new lOMoAR cPSD| 48302938
underwriting services. If the bank is expecting that the overall risk of the bank will be reduced
from adding the life insurance underwriting to the bank, what type of effect are they expecting?
Product Line Diversification effect
11. When a bank is expecting that the overall risk of FHC will be reduced when they combine
investment banking services with the traditional banking services, what type of effect are they expecting?
Product Line Diversification Effect
12. When a Bank is expecting to be ale to employ the same managers, employees and physical
resources to offer multiple products and generate costs savings they are expecting which of the following effects?
Economies of Scope effect
13. Trust department activities include all of the following except Lending
14. A financial holding company may include all of the following services except: IPO
15. historically, what has prevented universal banks from operating in the United States? the Glass-Stegall Act
16. Among potential advantages of combining various financial services activities in one FHC are
all of the following EXECPT: increasing earnings fluctuations
17. if the correlation between revenues from traditional banking an nontraditional services offered
by a bank rises, potential diversification benefits: will FALL
18. A company that offers shares in a pool of securities and flows through any earnings generated
to the shareholders is called: a mutual fund 19.
a savings instrument where the customer makes a lump sum payment to the investment
manager who invests the payment in earning assets and later receives a stream of income from the
assets is called an annuity 20.
a customer's PRO RATA value of a share in a mutual fund if the assets of the fun were
liquidated and liabilities paid off is called: the net asset value 21.
a private partnership whose shares are primarily offered to wealthy individuals and large
institutions and which often makes high-stakes bets on the direction of the market is called: a hedge fund
22. A bank is considering adding security underwriting services to the services it offers. It has
estimated that the expected return and standard deviation of its traditional service are 8% and
10% respectively. It has estimated that the expected return and standard deviation of its new
securities underwriting services are 16% and 20% respectively. The correlation between these
services has been estimated to be -0.3 and the bank estimates that 80% of its business will be
from traditional services and 20% from the new services. What is the expected return of the new combined firm? 14 lOMoAR cPSD| 48302938 9.6 %
23. A bank is considering adding security underwriting services to the services it offers. It has
estimated that the expected return and standard deviation of its traditional service are 8% and
10% respectively. It has estimated that the expected return and standard deviation of its new
securities underwriting services are 16% and 20% respectively. The correlation between these
services has been estimated to be -.3 and the bank estimates that 80% of its business will be
from traditional services and 20% from the new services. What is the standard deviation of the new combined firm? 7.8 %
24. A bank is considering adding security brokerage services to the services it offers. It has
estimated that the expected return and standard deviation of its traditional service are 6% and
14% respectively. It has estimated that the expected return and standard deviation of its new
securities brokerage services are 14% and 24% respectively. The correlation between these
services has been estimated to be -.4 and the bank estimates that 60% of its business will be
from traditional services and 40% from the new services. What is the expected return of the new combined firm? 9.2 %
25. A bank is considering adding security brokerage services to the services it offers. It has
estimated that the expected return and standard deviation of its traditional service are 6% and
14% respectively. It has estimated that the expected return and standard deviation of its new
securities brokerage services are 14% and 24% respectively. The correlation between these
services has been estimated to be -.4 and the bank estimates that 60% of its business will be
from traditional services and 40% from the new services. What is the standard deviation of the new combined firm? 9.91 %
26. According to the textbook the role of capital is to : All of the Above
27. the textbook discusses several alternative defenses banks have against risk. these defenses include: all of the above
28. measured by dollar volume the largest category of capital at U.S banks is: Surplus
29. the fundamental purposes of regulating bank capital cited in the textbook include which of the
following? all of the above
30. the internal capital growth rate for a bank is a function of which of the following factors? all of the above
31. second national bank is forecasting a return on equity of 15 percent for this year. the board of
directors wants to maintain its current policy of paying the banks stockholders 40 percent of
any net earnings the bank will earn. how fast can the banks assets grow this year without
jeopardizing its ratio of capital to assets? 15 %*(1-40%) = 9% lOMoAR cPSD| 48302938
32. possible breakdowns in quality control, inefficiencies in producing and delivering financial
services, weather damage, aging or faulty computer systems and simple errors in judgment by
bank management illustrate what form of RISK faced by banks? operational risk
33. the ratio of core capital to average assets is called the : leverage ratio
34. the risk that a customer the bank has entered into a contract with will fail to pay or to perform,
forcing the bank to find a replacement contract that may be less satisfactory is what form of risk listed below? counterparty risk
35. if a bank benefits when a foreign currency declines in value, then the bank must be in a
__________________ position. the term below that correctly fills in the blank Short
36. in the united states a "well capitalized" bank must have a ratio of capital to risk-weighted assets of at LEAST: 10 %
37. in the united states a bank to be considered "adequately capitalized" must have a ratio tier 1 (
or core) capital to risk-weighted assets of at least : 4 %
38. a "well capitalized" bank in the united states must have a leverage ratio of at least: 4 %
39. A bank has $100 million in assets in the 0 percent risk weight category, $200 million in assets
in the 20 percent risk weight category, $500 million in assets in the 50 percent risk weight
category and $750 million in assets in the 100 percent risk weight category. This bank has $57
million in core (Tier 1) capital. What is this bank's ratio of Tier 1 capital to risk-weighted
assets? RWA = 2000.2 + 5000.5 + 750*1 = 1040 tier 1 capita to RWA = 57/1040 tier 1 capital to RWA = 5.48%
40. A bank has a profit margin of 5 percent, an asset utilization ratio of 11 percent , an equity
multiplier of 12 and a retention ratio of 60 percent. What is this bank's ICGR
ICGR = 5 11 12 * 60% = 3.96%
41. which of the following would be an example of Tier 1 capital? minority interest in the equity
accounts of consolidated subsidiaries 42 . which of the following would be an example of tier 2 capital?
subordinated debt capital instruments with an original maturity of at least 5 years
43 . which of the following would be an example of crime risk?
a bank manager that embezzles $1,000,000 from the bank
44. which of the following assets fits into the 0 percent risk weight category? All of the above fit into
the 0 percent risk weight category
45. a bank that is "well-capitalized" : faces no significant regulatory restrictions 16 lOMoAR cPSD| 48302938
46. a bank that is "critically undercapitalized" will be placed into conservatorship or receivership if
it its capital level is not increased within a certain time limit
47. a bank that is adequately capitalized :
cannot accept broker-placed deposits without regulatory approval
48. which of the following is in the 100 percent risk-weight category? credit card loans
49. which of the following is in the 50 percent risk-weight (moderate) category?
residential mortgage loans
50. which of the following is in the 20 percent risk-weight (low) category?
general obligation municipal bonds
51. a bank has a ROE of 14 percent and a ROA of 2 percent. what is this banks equity capital to total assets ratio?
(0.02)*(1/0.14) = 0.14285 14.29 %
52. a bank has $200 million in assets in the 0 percent risk-weight category. it has $400 million in
assets in the 20 percent risk-weighted category. it has $1000 million in assets in the 50 percent
risk-weighted category and has $1000 million in assets in the 100 percent risk-weighted
category. this bank has $96 million in tier 1 capital and $48 million in Tier 2 capital. what is
this banks ratio of Tier 1 capital to risk assets?
RWA = 4000.2 + 1000.5 + 1000*1 = 1580
Tier 1 = 96/1580 = .06075 6.08 %
53. a bank has $200 million in assets in the 0 percent risk-weight category. it has $400 million in
assets in the 20 percent risk-weighted category. it has $1000 million in assets in the 50 percent
risk-weighted category and has $1000 million in assets in the 100 percent risk-weighted
category. this bank has $96 million in tier 1 capital and $48 million in Tier 2 capital. what is
this banks ratio of Tier 2 capital to risk assets
RWA= 4000.2 + 1000.5 + 1000*1 = 1580
Tier 2 = 48/1580 = 0.03037 3.04 %
54. a bank has $200 million in assets in the 0 percent risk-weight category. it has $400 million in
assets in the 20 percent risk-weighted category. it has $1000 million in assets in the 50 percent
risk-weighted category and has $1000 million in assets in the 100 percent risk-weighted
category. this bank has $96 million in tier 1 capital and $48 million in Tier 2 capital. What is
this banks ratio of total capital to risk assets?
4000.2 + 1000.5 +1000*1 = 1580
Total capital of bank = 96 + 48 = $ 144 Million
Total capital to risk-weighted assets ratio of bank = 144 Million / 1580 Million = 0.0911 9.11 % lOMoAR cPSD| 48302938
55. a bank has a net profit margin of 5.25 percent. it has an asset utilization ratio of 45 percent and
has an equity multiplier of 12. it retains 40 percent of its earnings each year. what is this banks
internal capital growth rate?
0.0525.4512*0.40 = 0.1134 11.34 %
56. the revised Basel 1 rules impose capital requirements for market risk on: only the LARGEST banks
57. bank debt which appears to be highly sensitive to the market perception of the banks risk is
which of the following? subordinated debt capital
58. bank operational risk includes : all of the above
59. the issue of correctly adding up all of the different types of bank risk exposure is known as: risk AGGREGATION
60. for a bank with deficient capital ratios, which of the following actions could be required by
regulators to increase the capital ratios, all else constant?
cut the banks dividend payment
61. Basel II has a different set of rules for different bank size categories and the number of categories is: Two
62. which of the following would be an example of exchange risk?
a bank loses $500,000 from trading in foreign currencies
63 . which of the following would be an example of credit risk?
a $1,000,000 loan to a business on which no interest or principal has been collected in 2 years
64. which of the following would be an example of interest rate risk?
a bank manager predicts interest rates will rise. however, interest rates fall causing the banks net income to fall by $250,000
65 . which of the following would be an example of operational risk?
an out of date computer system causes the bank to lose $750,000 66 .
which of the following would be an example of liquidity risk?
a bank is forced to sell $1,000,000 in loans at a loss in order to meet the needs of depositors
67. which of the following would NOT be an example of operational risk?
a bank robber robs a teller at gun point and gets away before police can get to the bank
68. The Jennings Bank of Texas wants to protect itself from credit risk by making large loans to
corporate customers, by making residential mortgages to families, by making agriculture loans
to farmers and ranchers in the area, by making small business loans to business along main
street and by making automobile loans for the car dealership across the street from the bank.
What defense against risk is this bank making?
portfolio diversification 18 lOMoAR cPSD| 48302938
69. The Michelson Bank of Stetson wants to protect itself from risk. It decides to make loans in
Florida, Georgia, Texas and Oklahoma as well as invest in municipal bonds from California
and Oregon. What defense against risk is this bank making?
geographic diversification
70. The Perdue Bank of Houston has just hired a new manager who has a reputation of
anticipating potential problems and acting quickly to prevent those problems so that the bank
stays healthy and profitable. What defense against risk is this bank making? Quality management
71. The Norton Bank of Illinois has just issued trust preferred stock. What defense against risk is this bank making?
increasing owners capital
72. what type of preferred stock has become popular among large banks in recent years, partly
because dividends paid are tax deductible for the issuing institution trust preferred stock
73. even if individual banks are good at forecasting risk using VAR models there may still be
problems because losses may occur at several banks at the same time due to the
interdependency of the financial system, magnifying each banks risk exposure and possibly
causing a major problem for regulators. the book calls this: systematic risk
74. there are three pillars of Basel II. one of them wants to make market discipline a powerful force
compelling risky banks to lower their risk exposure. what does Basel II want to do to make this happen?
require greater public disclosure of each banks true financial condition
75. a bank has a capital to risk weighted assets of 11.5%, tier 1 capital to risk weighted assets of
7.2 % and a leverage ratio of 5.8%. what type of bank is this? Well capitalized
76. a bank has a capital to risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 5
% and a leverage ratio of 4.8%. what type of bank is this? adequately capitalized
77. a bank has capital risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 4.5%
and a leverage ratio of 3.7%. what type of bank is this? undercapitalized
78. a bank has capital to risk weighted assets of 5.5%, tier 1 capital to risk weighted assets of 2.8
% and a leverage ratio of 2.6%. what type of bank is this?
significantly undercapitalized
79. a bank has capital to risk weighted assets of 1.8%. what type of bank is this?
Critically undercapitalized
80. which of the following is NOT a weakness of Basel I risk-based capital standards?
they ignore credit risk
81. a bank has decided to retain more of their earnings, moving their retention ratio from 40% to
70 %. what way of meeting their capital needs is the bank taking? lOMoAR cPSD| 48302938 issuing COMMON stock
82. the First National Bank of Tucson has determined that the value of their property in Tucson
has tripled in the last three years. they decide that they would like to use this property to raise
funds and will rent space from the new owners of the building. what way of meeting their
capital needs is the bank taking?
selling assets and leasing facilities
83. the Second National bank of Lincoln has decided that to raise funds it is going to issue new
common equity through a pre-emptive rights offering so that current owners will not have that
ownership diluted. what way of meeting their capital needs is the bank taking? issuing common stock
84. the third State Bank of Denton has decided to issue stock through a trust company and borrow
the funds from the trust company. this stock pays a fixed dividend and because of the way the
stock has been issued it is tax deductible. what way of meeting their capital needs in the bank taking?
issuing preferred stock
85. the Northwest bank of Charlotte has decided to issue new securities that have five years to
maturity that have claims to assets that follow the claims of depositors. what way of meeting
their capital needs is the bank taking?
issuing subordinated notes and debentures
86. why do regulators prefer higher capital requirements?
it better protects the deposit insurance fund
87. why do banks generally prefer lower capital requirements?
to increase a banks return on equity
88. a bank has issued $5,000,000 in long term debt and since that time interest rates have risen so
that it will only cost the bank $3,000,000 to buy the long term debt back. the bank decides to
issue $3,000,000 in new stock and use the proceeds to retire the long term debt. what way of
meeting their capital needs is the bank taking?
swapping stock for debt instruments
89. which is the following are the reasons for having the government set capital standards for
financial institutions as opposed to letting the private marketplace set those standards? all of the above
90. the following are advantages of Basel II over Basel I EXECPT :
applies the same minimum capital requirements to all banks
91. The principal economic function of banks is to : Make Loans
92. Loans extended to finance the purchase of automobiles, mobile homes, home appliances, and
vacations are classified as: NONE of the above
93. according to the textbook the largest category (by dollar volume) of loans extended by U.S banks is : 20