1. Capital is the primary protection for an FI against the risk of insolvency and failure.
2. The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders.
3. Protecting FI insurance funds in the event of an FI failure is the responsibility of taxpayers.
4. One function of bank capital is to protect uninsured depositors, bondholders, and creditors in the event of
insolvency and liquidation.
5. The book value of bank equity is the present value of assets minus the present value of liabilities.
6. One function of capital is to provide funding for real assets, such as branches and technology, that are
necessary to provide financial services.
7. The function of capital to serve as a source of funds is critical to regulators in setting risk-based deposit
insurance premiums.
8. The economic definition of the value of an FI’s equity is the book value of assets minus the market value of
liabilities.
9. Market value of equity is better than book value of equity at reflecting changes in the credit risk and interest
rate risk of an FI.
10. 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.
11. 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.
12. The market value of capital is equal to market value of assets minus the market value of liabilities.
13. The book value of equity is seldom equal to the market value of equity.
14. An FI may be insolvent in market value terms even if the book value of equity is positive.
15. Equity holders absorb credit losses on the asset portfolio because liability holders are senior claimants.
16. 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.
17. The book value of bonds and loans reflects the market value of those assets when they were placed on the
books of an FI.
18. Except in cases of extreme credit risk shocks or interest rate risk shocks, the book value of equity is equal to
the economic or market value of equity.
19. Under Generally Accepted Accounting Principles, FIs have flexible rules in recognizing the amount and
timing of loan losses.
20. When a substandard loan is identified by a regulator, it is required that the loan immediately be charged off
by the bank.
21. Book value accounting systems recognize the impact of credit risk problems sooner than interest rate risk
problems.
22. It is likely that the discrepancy between book value of equity and market value of equity will increase as
volatility in interest rates increases.
23. More frequent regulatory examinations and stricter regulator standards will cause greater discrepancies in
book value of equity and the market value of equity.
24. A market to book ratio greater than one indicates that the book value of equity is overstated.
25. 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.
26. Market value accounting often is said to be difficult to implement because of the amounts of nontraded
assets.
27. Market value accounting is likely to increase the variability of earnings of an FI.
28. The implementation of true market value accounting for FIs may have adverse effects on small business
29. The SEC requires securities firms to follow capital rules that utilize market value accounting.
30. FDICIA required that banks and thrifts adopt the same capital requirements.
31. The greater is the leverage ratio, the more highly leveraged is the bank.
32. The leverage ratio measures the amount of an FI‘s core capital relative to total assets.
33. Under FDICIA, the ability for regulators to show forbearance is limited by a set of mandatory actions for
each level of capital that an FI achieved as measured by the leverage ratio.
34. Under FDICIA, regulators are required to take prompt corrective action steps when a DI falls outside of
Zone 1.
35. The leverage ratio specified under FDICIA protects the depositors and the insurance fund from the effects of
risk that may cause the market value of assets to be negative.
36. The leverage ratio specified under FDICIA does not account for the risks of off-balance- sheet activities.
37. Basel I requires banks in the member countries of the Bank for International Settlements to utilize
risk-based capital ratios.
38. Under Basel II, total capital is equal to Tier I capital plus Tier II capital.
39. Under Basel II, the credit risk and interest rate risk of assets on the balance sheet as well as off the balance
sheet are differentiated.
40. Under Basel II, Tier I capital measures the market value of common equity plus the amount of perpetual
preferred stock plus minority equity interest held by the bank in subsidiaries minus goodwill.
41. Under Basel II, banks must hold a total capital to credit risk-adjusted assets equal to 8 percent to be
adequately capitalized.
42. Under Basel II, regulatory minimum capital requirements for credit, market, and operational risks are
covered in the first pillar of the regulation.
43. Under Basel II, banks are allowed to use their internal estimates of borrower creditworthiness to assess
credit risk subject to strict disclosure standards.
44. Under Basel II, operational risk can be measured by four different approaches.
45. In addition to establishing minimum capital requirements, Basel II proposed procedures to ensure that sound
internal processes are used to assess capital adequacy and to set targets that are commensurate with the risk
profile and environment.
46. Basel II attempts to encourage market discipline by having banks disclose capital structure, risk exposures,
and capital adequacy in a systematic manner.
47. The use of risk-based capital measures under Basel I effectively mark-to-market the bank’s on- and
off-balance-sheet for the purpose of reflecting credit and market risk.
48. The determination of risk-adjusted on-balance-sheet assets under Basel II requires the segregation of assets
into five categories of credit risk exposure.
49. Under Basel II, the credit risk-adjusted 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.
50. As compared to Basel I, the standardized approach of Basel II is designed to produce capital ratios that are
more in line with the actual economic risks that the DIs are facing.
51. Similar to Basel I, Basel II will require banks to assign on-balance-sheet assets to one of four categories of
credit risk exposure.
52. Under the 2008-2009 TARP Capital Purchase Program, senior preferred shares of stock purchased by the
U.S. Treasury are classified as Tier II Capital.
53. The evaluation of credit risk of off-balance-sheet assets under Basel II requires that the notional amount of
OBS items be converted to credit equivalent amounts of on-balance-sheet items.
54. Under Basel II, OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet
principal items to determine their risk-adjusted asset values.
55. In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent
guaranty contracts, the risk weights are determined by the credit rating of the underlying counterparty of the
off-balance-sheet activity.
56. Basel II guidelines for determining credit risk-adjusted on-balance-sheet assets relies more heavily on credit
agency ratings than did Basel I.
57. Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.
58. Counterparty credit risk is more prevalent for exchange-traded derivatives than over-the-counter (OTC)
contracts because the bank has more control of its OTC contracts.
59. The risk-adjusted asset values of OBS market contracts or derivative instruments are determined in a
manner similar to the risk-adjusted asset values of contingent guarantee claims.
60. Determining risk-adjusted asset values for OBS market contracts requires multiplying the notional values by
the appropriate risk weights.
61. In evaluating the risk-adjusted asset value of foreign exchange forward contracts, the value of the current
exposure can be either positive or zero.
62. A deficiency of the risk-based capital ratio is that it measures the ability of a bank to meet both the on- and
off-balance-sheet credit risk, but not the interest rate or market risks.
63. Operational risk has increased to a point that the BIS will require DIs to account for it in the capital
adequacy standards under Basel II.
64. 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.
65. The Standardized Approach in calculating capital to cover operational risk requires DIs to separate activities
into business units from which a capital charge is determined based on the amount of operational risk in each
unit.
66. The risk-based capital ratio fails to take into account the effects of diversification in the credit portfolio.
67. The risk-based capital ratio does account for loans made to companies with different credit ratings.
68. The capital requirements for broker-dealers include a net worth market value to assets ratio of at least 2
percent.
69. Broker-dealers make very few adjustments to the book value net worth to reach an approximate market
value net worth.
70. The risk-based capital model in the life insurance industry includes asset risk, business risk, insurance risk,
and interest rate risk.
71. In the life insurance model, morbidity risk differs from mortality risk by the circumstances surrounding the
actual death event.
72. In the life insurance model, the ratio of total surplus and capital to the risk-based capital calculation must be
greater than or equal to 1.0 for the insurance company to be satisfactorily capitalized.
73. In the property-casualty insurance model, risk-based capital is a function of six different risk categories.
74. The difference between the market value of assets and liabilities is the definition of the
75. Regulatory-defined capital and required leverage ratios are based in whole or in part on
76. Each of the following is a function of capital EXCEPT
77. Under market value accounting methods, FIs
78. Losses in asset values due to adverse changes in interest rates are borne initially by the
79. Through August 2009, approximately which of the following indicates the amount of funds paid back to the
U.S. Treasury as part of the TARP Capital Purchase Program?
80. Through August 2009, approximately which of the following indicates the amount of dividends and
assessments that the U.S. Treasury has received from entities participating in the TARP Capital Purchase
Program?
81. What is the impact on economic capital of a 25 basis point decrease in interest rates if the FI is holding a
20-year, fixed-rate, 11 percent annual coupon bond selling at a par value of $100,000?
82. 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?
83. Which of the following statements is true?
84. Which of the following is not a component of the book value of capital for an FI?
85. The par value of shares is
86. The surplus value of shares is
87. Retained earnings
88. Loan loss reserves are
89. Under historical accounting methods, FIs