Question 1

Bank capital does NOT include which of the following?

Accepted Answer

A)   equity
B)   long-term debt
C)   commercial paper
D)   capital reservesE) None of the above
F) A) and C)

Question 2

Shareholders co-insure against bank losses by:

Accepted Answer

A)   merging the failed bank with a solvent bank
B)   holding equity in the bank
C)   purchasing the bank's notes and debentures
D)   paying deposit insurance premiumsE) A) and C)
F) B) and D)

Question 3

Under the Basel I capital rules, banks with abnormal risk levels must maintain capital in excess of the minimum requirements.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following factor(s)  can affect banks' debt-equity mix decision from the viewpoint of shareholders?

Accepted Answer

A)   dividend policy
B)   ownership control
C)   financial risk
D)   all of the aboveE) All of the above
F) C) and D)

Question 5

Total capital equals:

Accepted Answer

A)   Tier 1 capital
B)   Tier 2 capital
C)   Tier 3 capital
D)   a and bE) B) and D)
F) All of the above

Question 6

Under the current risk-based capital requirement, total capital as a percent of risk-adjusted assets must be at least:

Accepted Answer

A)   4 percent
B)   6 percent
C)   8 percent
D)   10 percentE) A) and B)
F) C) and D)

Question 7

The amount of paid-in capital in excess of par value realized by the bank upon the initial sale of stock is called:

Accepted Answer

A)   retained earnings
B)   book value of shares
C)   surplus
D)   market value of sharesE) B) and D)
F) B) and C)

Question 8

The new capital rules take into account credit risk and interest rate risk.

Accepted Answer

A) True 
 B)False

Question 9

Loan-loss reserves are counted in:

Accepted Answer

A)   Tier 1 capital
B)   Tier 2 capital
C)   Tier 3 capital
D)   a and bE) All of the above
F) B) and C)

Question 10

The capital adequacy decision is a trade-off between the safety and soundness and the _____________ of the banking system.

Accepted Answer

A)   efficiency
B)   competitiveness
C)   a and b
D)   none of the aboveE) All of the above
F) A) and B)

Question 11

In what section of the balance sheet are the loan-loss reserves carried?

Accepted Answer

A)   assets
B)   liability
C)   equity
D)   they do not appear on the balance sheet.E) B) and D)
F) A) and C)

Question 12

The provision for loan losses, for accounting purposes, is classified as a (an) :

Accepted Answer

A)   equity
B)   expense
C)   liability
D)   revenue
E)   none of the aboveF) C) and D)
G) A) and B)

Question 13

Normally, the market value of equity exceeds the book value of equity for commercial banks.

Accepted Answer

A) True 
 B)False

Question 14

Because deposit insurance may create incentives for a bank to take excessive risks at the expense of the insuring agency, there is a moral-hazard problem.

Accepted Answer

A) True 
 B)False

Question 15

Regulatory forbearance caused losses to increase with respect to failed depository institutions in the 1980s. An example of regulatory forbearance is:

Accepted Answer

A)   low, fixed deposit insurance premiums
B)   low, uniform capital requirements
C)   not closing insolvent institutions
D)   all of the aboveE) None of the above
F) A) and B)

Question 16

The rate at which a bank can internally expand assets and still maintain its capital ratio is known as the:

Accepted Answer

A)   capitalization rate
B)   internal capitalization rate
C)   internal capital generalization rate
D)   internal generalization rate
E)   internal rate of expansionF) All of the above
G) A) and E)

Question 17

Capital requirements do NOT reduce the moral-hazard problem of deposit insurance.

Accepted Answer

A) True 
 B)False

Question 18

From a regulator's viewpoint, greater variability of bank earnings means:

Accepted Answer

A)   the bank is insolvent.
B)   the bank requires more capital.
C)   the bank requires less capital.
D)   the shareholders will demand a higher rate of return.E) A) and B)
F) A) and C)

Question 19

When undercapitalized banks raised new capital in response to a uniform capital requirement in 1981, what other action(s)  did they take which tended to offset the advantage of added capital?

Accepted Answer

A)   increased off-balance sheet activities.
B)   reduced service prices.
C)   made riskier loans.
D)   a and b
E)   a and cF) All of the above
G) B) and E)

Question 20

Which of the following statements is true about transaction costs in issuing debt securities when comparing banks and nonfinancial corporations?

Accepted Answer

A)   the costs of issuing debt are nominally higher for banks
B)   the costs of issuing debt are normally higher for nonfinancial corporations
C)   the costs of issuing equity are normally lower for bankers
D)   none of the aboveE) A) and D)
F) B) and D)

Exam 12: Capital Management

Under the Basel I capital rules, banks with abnormal risk levels must maintain capital in excess of the minimum requirements.

Correct AnswerverifiedShow Answer

The provision for loan losses, for accounting purposes, is classified as a (an) :

Correct AnswerverifiedShow Answer

The amount of paid-in capital in excess of par value realized by the bank upon the initial sale of stock is called:

Correct AnswerverifiedShow Answer

Shareholders co-insure against bank losses by:

Correct AnswerverifiedShow Answer

In what section of the balance sheet are the loan-loss reserves carried?

Correct AnswerverifiedShow Answer

The new capital rules take into account credit risk and interest rate risk.

Correct AnswerverifiedShow Answer

Which of the following factor(s) can affect banks' debt-equity mix decision from the viewpoint of shareholders?

Correct AnswerverifiedShow Answer

Capital requirements do NOT reduce the moral-hazard problem of deposit insurance.

Correct AnswerverifiedShow Answer

Total capital equals:

Correct AnswerverifiedShow Answer

When undercapitalized banks raised new capital in response to a uniform capital requirement in 1981, what other action(s) did they take which tended to offset the advantage of added capital?

Correct AnswerverifiedShow Answer

From a regulator's viewpoint, greater variability of bank earnings means:

Correct AnswerverifiedShow Answer

Regulatory forbearance caused losses to increase with respect to failed depository institutions in the 1980s. An example of regulatory forbearance is:

Correct AnswerverifiedShow Answer

Which of the following statements is true about transaction costs in issuing debt securities when comparing banks and nonfinancial corporations?

Correct AnswerverifiedShow Answer

Under the current risk-based capital requirement, total capital as a percent of risk-adjusted assets must be at least:

Correct AnswerverifiedShow Answer

Because deposit insurance may create incentives for a bank to take excessive risks at the expense of the insuring agency, there is a moral-hazard problem.

Correct AnswerverifiedShow Answer

The capital adequacy decision is a trade-off between the safety and soundness and the _____________ of the banking system.

Correct AnswerverifiedShow Answer

The rate at which a bank can internally expand assets and still maintain its capital ratio is known as the:

Correct AnswerverifiedShow Answer

Loan-loss reserves are counted in:

Correct AnswerverifiedShow Answer

Normally, the market value of equity exceeds the book value of equity for commercial banks.

Correct AnswerverifiedShow Answer

Bank capital does NOT include which of the following?

Correct AnswerverifiedShow Answer

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