FIN 465 Chapter 20 Flashcards Quizlet PDF

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07/09/2020

FIN 465 Chapter 20 Flashcards | Quizlet

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Key concepts: Counterparty Credit Risk

Interest Rate Risk

Market Value Of Equity

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Terms in this set (97) The difference between

C

the market value of assets and liabilities is the definition of the A. accounting value of capital. B. regulatory value of capital. C. economic value of capital. D. book value of net worth. E. adjusted book value of net worth.

Regulatory-defined

B

capital and required leverage ratios are based in whole or in part on A. market value accounting concepts. B. book value accounting concepts. C. the net worth concept. D. the economic

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meaning of capital. E. None of the options.

Each of the following is

C

a function of capital EXCEPT A. funding the branch and other real investments to provide financial services. B. protecting the insurance fund and the taxpayers. C. assuring the highest possible return on equity for the shareholders. D. protecting uninsured depositors in the event of insolvency and liquidation. E. absorbing losses in a manner that allows the FI to continue as a going concern.

Under market value

A

accounting methods, FIs A. must write down the value of their assets to fully reflect market values. https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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B. have a great deal of discretion in timing the write downs of problem loans. C. must conform to regulatory write-down schedules. D. have an incentive to fully reflect problem assets as they become known. E. are required to invest in expensive computerized bookkeeping systems.

Losses in asset values

A

due to adverse changes in interest rates are borne initially by the A. equity holders of an FI. B. liability holders of an FI. C. regulatory authorities. D. taxpayers. E. insured depositors.

Through August 2015,

C

which of the following approximates the amount of funds paid back to the U.S. Treasury as part of the TARP Capital Purchase Program? https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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A. $192.1 billion. B. $120.0 billion. C. $236.5 billion. D. $26.9 billion. E. $19.6 billion.

Through August 2015,

C

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? A. $20.1 billion. B. $1.2 billion. C. $34.6 billion. D. $16.0 billion. E. $26.25 billion.

What is the impact on

C

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? A. A decrease of $250. B. An increase of $250. https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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C. An increase of $2,024. D. A decrease of $1,959. E. No impact on capital since the book value is unchanged.

From a regulatory

E

perspective, what is the impact on book value capital of a 25 basis point decrease in interest rates if the FI is holding a 20-year, fixed-rate, 11 percent annual coupon $100,000 par value bond? A. A decrease of $250. B. An increase of $250. C. An increase of $2,023. D. A decrease of $1,959. E. No impact on capital since the book value is unchanged.

The FASB set its

E

guidelines to allow for the valuation of assets to be based on A. prices at the discretion of the DI's management. B. book values rather than market values. https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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C. market values that existed when the assets were last marked to market. D. prices that would be received as part of a forced liquidation. E. prices that would be received in an orderly market.

Under historical

B

accounting methods for the market value of capital, FIs A. must write down the value of their assets to fully reflect market values. B. have a great deal of discretion in timing the write downs of problem loans. C. must conform to regulatory write-down schedules. D. have an incentive to fully reflect problems in the asset portfolio as they become known. E. invest in expensive computerized bookkeeping systems.

During the financial

A

crisis of 2008-2009, the FASB provided https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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guidance on asset valuation that allowed A. DI management to use internal cash flow models and assumptions to estimate fair value when there is limited market data available. B. regulatory capital of banks to deviate from industry norms. C. excess reserves with the Fed to be included as regulatory capital. D. DIs to choose either book value treatment or market value treatment of asset valuation. E. DI management the option to postpone asset write-downs until adequate capital was available.

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Using a strict market

Only A$4/month

B

value accounting might cause regulators to

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A. revert to book value accounting in order to determine net worth. B. close banks too early under prompt corrective action requirements. C. exempt Dis from prompt corrective action. D. allow banks to operate without oversight even with negative net worth. E. suspend regulatory capital requirements during temporary spikes in interest rates.

Those regulatory

A

agencies that have adopted some form of book value accounting standard to measure an FI's capital include all of the following except A. The Securities and Exchange Commission (SEC). B. The Federal Reserve. C. The Office of the Comptroller of the Currency (OCC). D. The FDIC. E. State regulatory agencies.

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Which of the following

C

is NOT a typical argument against market value accounting? A. Market value accounting introduces an unnecessary degree of variability into an FI's earnings. B. The use of market value accounting may reduce the willingness of FI's to invest in longerterm assets. C. FI's are increasingly trading, selling, and securitizing assets. D. Market value accounting is difficult to implement. E. Market value accounting may interfere with an FI's special functions as lenders and monitors of credit.

The U.S. banking

D

industry built up record levels of capital in the early 2000s because A. the economy went through a downturn. B. problem loans https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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increased. C. the regulators required higher amounts of equity sales. D. of record high levels of profitability. E. of mergers between large banks.

Bank regulators set

C

minimum capital standards to A. inhibit rapid growth rate of bank assets. B. protect shareholders from managerial fraud or incompetence. C. protect creditors from decreases in asset values. D. force banks to follow socially desirable policies. E. make work for regulators.

The concept of prompt

D

corrective action refers to the requirement A. that bank managers must address problems in the loan portfolio when they are first identified. B. that regulators must take specific actions https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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when bank capital levels fall outside the wellcapitalized category. C. that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent. D. that regulators must take specific actions when bank capital levels fall outside the wellcapitalized category and that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent. E. that all of the options are correct.

The Basel capital

A

requirements differ from previous capital standards in all except one of the following ways? A. More stringent capital standards for large banks than for small banks. B. Inclusion of off balance sheet assets in https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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the asset base. C. Restrictions on the amount of goodwill that can be counted towards primary or Tier I capital. D. Risk weighting of assets on the basis of credit risk exposure. E. Risk weighting of off balance sheet contingencies.

The Basel capital

D

requirements are based upon the premise that A. banks with riskier assets should have higher capital ratios. B. banks with riskier assets should have lower capital ratios. C. banks with riskier assets should have lower absolute amounts of capital. D. banks with riskier assets should have higher absolute amounts of capital. E. there is no relationship between asset risk and capital.

The Basel I capital

D

requirements as currently implemented https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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include A. different credit risks of on-balance-sheet assets. B. different credit risks of off-balance-sheet assets. C. the consideration of market risk in 1998. D. All of the options. E. Only two of the options.

The Basel II Accord

B

effective at year-end 2007 in the United States A. includes provisions covering minimum capital requirements for credit, market, and interest rate risk. B. stresses the regulatory supervisory process by requiring regulators to be more involved in evaluating the bank's specific risk profile and environment. C. requires only banks on the regulatory problem bank list to disclose publicly the degree and https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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cause banks to hold an additional 12 percent of capital. C. an internal rating system in which they must adhere to strict methodological and disclosure standards. D. All of the options. E. a standardized approach similar to that used under Basel I and an internal rating system in which they must adhere to strict methodological and disclosure standards.

The bank is considering

D

changing its asset mix by moving $100 million of commercial loans into Treasury securities. If it does change the asset mix and capital remains the same, the risk-based capital ratio A. will not change because the total assets have not changed. B. will decrease because the earnings rate on Treasuries is https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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less than on loans. C. will increase by 16.67 percent. D. will increase because the assets will have less risk. E. will change, but the direction cannot be determined with the information given.

Which of the following

A

is not a category of capital under Basel III? A. Tier III capital. B. Tier II capital. C. Common Equity Tier I. D. Total risk-based capital. E. Tier I capital.

Which of the following

B

assets is deducted from Common Equity Tier I capital? A. Trademarks. B. Goodwill. C. Patents. D. Bank premises. E. None of the options.

Which of the following

C

is not included in the Common Equity Tier I capital under Basel https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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depth of problem issues as well as their capital adequacy. D. All of the options. E. stresses the regulatory supervisory process by requiring regulators to be more involved in evaluating the bank's specific risk profile and environment and requires only banks on the regulatory problem bank list to disclose publicly the degree and depth of problem issues as well as their capital adequacy.

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The measurement of

Only A$4/month

E

credit risk under the Basel II Accord allows banks to choose between A. a standardized approach similar to that used under Basel I. B. a basic indicator approach that will https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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III? A. Retained earnings. B. Par value of common shares issued by the bank. C. Par value of noncumulative perpetual preferred stock. D. Paid-in excess (surplus) of common stock. E. Common shares issued by consolidated subsidiaries of the bank.

Which of the following

E

statements best describes the treatment of adjusting for credit risk of off-balancesheet activities? A. All OBS activities are treated equally in making credit-risk adjustments. B. Standby letter of credit guarantees issued by banks to back commercial paper have a 50 percent conversion factor. C. The credit or default risk of over-the-counter contracts is https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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approximately zero. D. The current exposure component of the credit equivalent amount of OBS derivative contracts reflects the credit risk if the contract counterparty defaults. E. The treatment of interest rate forward, option, and swap contracts differs from the treatment of contingent or guarantee contracts.

A criticism of the Basel I

D

risk-based capital ratio is A. the incorporation of off-balance-sheet risk exposures. B. the application of a similar capital requirement across major banks in international banking centers across the world. C. the more systematic accounting of credit risk differences. D. the lack of appropriate consideration of the portfolio diversification https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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effects of credit risk. E. the application of a similar capital requirement across major banks in international banking centers across the world and the more systematic accounting of credit risk differences.

Which of the following

B

is NOT a criticism of the Basel I risk-based capital ratio? A. All commercial loans are given equal weight regardless of the credit risk of the borrower. B. The ratio incorporates offbalance-sheet risk exposures. C. Grouping assets into different risk categories may encourage balance sheet asset allocation games. D. The treatment does not include interest rate or foreign exchange risk. E. The weights in the four risk categories imply a cardinal measurement of https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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relevant risk between each category. The primary difference

C

between Basel I and the proposed Basel III in calculating riskadjusted assets is A. that Basel II considers OBS assets. B. the use of only three weight classes rather than four classes. C. a heavier reliance on the use of ratings by external credit rating agencies for the assignment of assets to weight classes. D. All of the options. E. that Basel II considers OBS assets as well as a heavier reliance on the use of ratings by external credit rating agencies for the assignment of assets to weight classes.

The primary difference

A

between Basel I and the proposed Basel III in converting OBS values to on-balancehttps://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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sheet credit equivalent amounts is A. the use of credit ratings in Basel III to assign credit risk weights on the OBS activities. B. the use of six weight classes by Basel III rather than four classes. C. the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities. D. All of the options. E. a heavier reliance on the use of ratings by external credit rating agencies for the assignment of assets to weight classes and the use of the underlying counterparty activity in Basel II to assign credit risk weights on the OBS activities.

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Counter party credit https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

Only A$4/month

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risk in OBS contracts A. is the risk that the counterparty will likely default when he is in the money on a contract position. B. refers to the risk that a counterparty will default when suffering large actual or potential losses on its position. C. requires the counterparty to return to the market and replace contracts at less favorable terms. D. All of the options. E. None of the options.

The potential exposure

C

component of the credit equivalent amount of OBS derivative items reflects A. the probability of an adverse price movement in contracts. B. the cost of replacing a contract if a counterparty defaults today. C. the probability today of a counterparty https://quizlet.com/350001800/fin-465-chapter-20-flash-cards/

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contract default in the future. D. the maximum price loss for any given position. E. the probability of an adverse price movement in contracts and the maximum price loss for any given position...