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Banking
Q:
What type of preferred stock has appeared recently that carry a lower cost?
A. Cumulative preferred stock
B. Noncumulative preferred stock
C. Convertible preferred stock
D. Trust preferred stock
E. None of the options is correct.
Q:
The Norton Bank of Illinois, has just issued trust preferred stock. What defense against risk is this bank making?
A. Portfolio diversification
B. Geographic diversification
C. Quality management
D. Increasing owners' capital
E. None of the options is correct.
Q:
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?
A. Portfolio diversification
B. Geographic diversification
C. Quality management
D. Increasing owners' capital
E. None of the options is correct.
Q:
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?
A. Portfolio diversification
B. Geographic diversification
C. Quality management
D. Increasing owners' capital
E. None of the options is correct.
Q:
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?
A. Portfolio diversification
B. Geographic diversification
C. Quality management
D. Increasing owners' capital
E. None of the options is correct.
Q:
Which of the following would not be an example of operational risk?
A. A bank, on the coast of Louisiana, is hit by a hurricane and is flooded for 6 weeks.
B. A bank employee working as a derivatives trader, is also the one who writes the reports on profits and losses in derivatives trading every day.
C. The banks older computer system breaks down causing a loss of service to customers for 2 weeks.
D. A bank robber robs a teller at gun point and gets away before police can get to the bank.
E. All of the examples are of operational risk.
Q:
Which of the following would be an example of liquidity risk?
A. A bank teller manages to steal $250,000 over a period of several months.
B. An out-of-date computer system causes the bank to lose $750,000.
C. A bank is forced to sell $1,000,000 in loans, at a loss, in order to meet the needs of depositors.
D. A $500,000 that loan the bank has made has been deemed uncollectible.
E. None of the examples are of liquidity risk.
Q:
Which of the following would be an example of operational risk?
A. A robber steals $250,000 from the bank locker.
B. An out-of-date computer system causes the bank to lose $750,000.
C. A bank is forced to sell $1,000,000 in loans, at a loss, in order to meet the needs of depositors.
D. A $500,000 loan that the bank has made has been deemed uncollectible.
E. None of the examples are of operational risk.
Q:
Which of the following would be an example of interest rate risk?
A. A bank manager embezzles $1,000,000 from the bank.
B. A bank that loses $500,000 from trading in foreign currencies.
C. A $1,000,000 loan given to a business on which no interest or principal has been collected in 2 years.
D. A bank manager predicts interest rates will rise. However, interest rates fall causing the bank's net income to fall by $250,000.
E. All of the options are examples of interest rate risk.
Q:
Which of the following would be an example of credit risk?
A. A bank manager embezzles $1,000,000 from the bank.
B. A bank that loses $500,000 from trading in foreign currencies.
C. A $1,000,000 loan given to a business, on which no interest or principal has been collected in 2 years.
D. A bank manager predicts interest rates will rise. However, interest rates fall causing the bank's net income to fall by $250,000.
E. All of the options are examples of credit risk.
Q:
Which of the following would be an example of exchange risk?
A. A bank manager embezzles $1,000,000 from the bank.
B. A bank that loses $500,000 from trading in foreign currencies.
C. A $1,000,000 loan given to a business, on which no interest or principal has been collected in 2 years.
D. A bank manager predicts interest rates will rise. However, interest rates fall causing the bank's net income to fall by $250,000.
E. All of the options are examples of exchange risk.
Q:
Basel II had a different set of capital rules for different banks, and the number of categories is:
A. two.
B. three
C. four.
D. five.
E. ten.
Q:
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?
A. Cut the bank's dividend payment.
B. Increase the bank's leverage.
C. Reduce the bank's holdings of cash.
D. Increase the bank's growth rate by making additional commercial loans.
E. Reduce the bank's holdings of Treasury securities.
Q:
The task of correctly adding up all of the different types of bank risk exposures is known as:
A. risk tallying.
B. summing risk.
C. risk aggregation.
D. risk accumulation.
E. risk totality.
Q:
As per the Basel Committee, a bank's operational risk includes:
A. employee fraud.
B. accounting errors.
C. computer breakdowns.
D. natural disasters.
E. All of the options are correct.
Q:
Which of the following is a bank debt that appears to be highly sensitive to the market perception of the bank's risk?
A. Deposits
B. Fed funds
C. Repos
D. Subordinated debt capital
E. Preferred stock
Q:
The revised Basel I rules imposed capital requirements for market risk on:
A. only the largest banks.
B. only the smallest banks.
C. only moderate size banks.
D. all banks.
E. no banks.
Q:
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 bank's internal capital growth rate?
A. 28.35 percent
B. 2.36 percent
C. 11.34 percent
D. 4.80 percent
E. None of the options is correct.
Q:
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-weight category. It has $1,000 million in assets in the 50 percent risk-weight category and has $1,000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of total capital to risk assets?
A. 6.08 percent
B. 3.04 percent
C. 9.11 percent
D. 5.54 percent
E. None of the options is correct.
Q:
A bank has a ROE of 14 percent and a ROA of 2 percent. What is this bank's equity capital to total assets ratio?
A. 7.00 percent
B. 14.29 percent
C. 28.00 percent
D. 16.00 percent
E. None of the options is correct.
Q:
Which of the following is in the 20 percent risk-weight (low credit risk) category?
A. Cash
B. General obligation municipal bonds
C. Residential mortgage loans
D. Credit card loans
E. None of the options is correct.
Q:
Which of the following is in the 50 percent risk-weight (moderate credit risk) category?
A. Cash
B. General obligation municipal bonds
C. Residential mortgage loans
D. Credit card loans
E. None of the options is correct.
Q:
Which of the following is in the 100 percent risk-weight category?
A. Cash
B. General obligation municipal bonds
C. Residential mortgage loans
D. Credit card loans
E. None of the options is correct.
Q:
A bank that is adequately capitalized:
A. faces no significant regulatory restrictions.
B. cannot accept broker-placed deposits without regulatory approval.
C. has limits on dividends and management fees it is allowed to pay and limits on the maximum asset growth rate among other restrictions.
D. will be placed into conservatorship or receivership if its capital level is not increased within a certain time limit.
E. None of the options is correct.
Q:
A bank that is 'critically undercapitalized':
A. faces no significant regulatory restrictions.
B. can only grant loan to highly leveraged borrowers.
C. cannot avoid seizure in all circumstances.
D. will be placed into conservatorship or receivership if its capital level is not increased within a certain time limit.
E. None of the options is correct.
Q:
A bank that is 'well-capitalized':
A. faces no significant regulatory restriction on its expansion.
B. cannot accept broker placed deposits without regulatory approval.
C. has limits on dividends and management fees it is allowed to pay and limits on the maximum asset growth rate among other restrictions.
D. will be placed into conservatorship or receivership if its capital level is not increased within a certain time limit.
E. None of the options is correct.
Q:
Which of the following assets fit(s) into the 0 percent risk-weight category?
A. Cash
B. Deposits at the Federal Reserve
C. Treasury Bills
D. GNMA mortgage-backed securities
E. All of the options are assets that fit into the 0 percent risk-weight category.
Q:
Which of the following would be an example of crime risk?
A. A bank manager embezzles $1,000,000 from the bank.
B. A bank that loses $500,000 from trading in foreign currencies.
C. A $1,000,000 loan given to a business on which no interest and principal has been collected in 2 years.
D. A bank manager predicts that interest rates will rise. However, interest rates fall causing the bank 's net income to fall by $250,000.
E. All of the options are examples of crime risk.
Q:
Which of the following would be an example of Tier 2 capital?
A. Subordinated debt capital instruments
B. Undivided profits
C. Minority interest in the equity accounts of consolidated subsidiaries
D. Qualifying noncumulative preferred stock
E. All of the options are correct.
Q:
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?
A. 6.60 percent
B. 3.96 percent
C. 7.20 percent
D. 0.33 percent
E. None of the options is correct.
Q:
A 'well capitalized' bank in the United States must have a leverage ratio of at least:
A. 4 percent
B. 5 percent
C. 6 percent
D. 8 percent
E. None of the options is correct.
Q:
In the United States a bank to be considered 'adequately capitalized' must have a ratio of Tier 1 (or core) capital to risk-weighted assets of at least:
A. 8 percent
B. 6 percent
C. 10 percent
D. 4 percent
E. None of the options is correct.
Q:
In the United States a 'well capitalized' bank must have a ratio of capital to risk-weighted assets of at least:
A. 6 percent.
B. 8 percent.
C. 10 percent.
D. 5 percent.
E. None of the options is correct.
Q:
The risk that a customer with whom the bank has entered into a contract with, will fail to pay or to perform, forcing the bank to find a replacement contract with another party that may be less satisfactory is what form of risk listed below?
A. Counterparty risk
B. Interest-rate risk
C. Operating risk
D. Credit risk
E. Liquidity risk
Q:
The ratio of core capital to average total assets is called the:
A. supplemental capital ratio.
B. leverage ratio.
C. long-term capital ratio.
D. GAAP capital ratio.
E. None of the options is correct.
Q:
Possible breakdowns in quality control, inefficiencies in producing and delivering financial services, weather damage, aging or faulty computer systems, and errors in judgment by bank management illustrate what form of risk faced by banks?
A. Credit risk
B. Liquidity risk
C. Interest-rate risk
D. Operational risk
E. None of the options is correct.
Q:
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 bank's stockholders 40 percent of any net earnings the bank will earn. How fast can the bank's assets grow this year without jeopardizing its ratio of capital to assets?
A. 15 percent
B. 9 percent
C. 8 percent
D. 6 percent
E. None of the options is correct.
Q:
The internal capital growth rate for a bank is a function of which of the following factors?
A. Profit margin.
B. Asset utilization.
C. Equity multiplier.
D. Earnings retention ratio.
E. All of the options are correct.
Q:
The fundamental purposes of regulating bank capital cited in the textbook include which of the following?
A. To reduce liquid funds held by the banks.
B. To preserve public confidence in banks.
C. To limit losses to the public arising from insurance claims.
D. To increase the risk taking ability of the banks.
E. To reduce liquid funds held by the banks and to increase the risk taking ability of the banks.
Q:
Measured by dollar volume, the largest category of capital at U.S. banks is:
A. par value of common stock.
B. subordinated notes and debentures.
C. surplus.
D. undivided profits and capital reserves.
E. None of the options is correct.
Q:
The textbook discusses several alternative defenses banks have against risk. These defenses include:
A. quality management.
B. portfolio diversification.
C. geographic diversification.
D. deposit insurance.
E. All of the options are correct.
Q:
According to the textbook, the role(s) of capital is to:
A. provide a cushion against failure risk.
B. provide funds needed to charter, organize, and operate a bank.
C. promote public confidence.
D. support growth and the development of new services.
E. All of the options are correct.
Q:
Regulatory capital focuses on the market value of equity.
Q:
A well-capitalized institution has a ratio of capital to risk-weighted assets of at least 10 percent and faces no significant regulatory restrictions on its expansion.
Q:
Smaller banks rely more heavily on internally generated capital than larger banks.
Q:
The global financial crisis of 2007-2009 highlighted the importance of taking into consideration a bank's exposure to market risk that arise from changes in interest rates, security prices, and currency.
Q:
It is anticipated that Basel III may increase capital requirements for banks.
Q:
Basel II requires each bank to determine its own capital requirements based on its own calculated risk exposure.
Q:
One of the key pillars for capital regulation in Basel II was to require banks to hold capital against its own estimated risk exposure from operational risk.
Q:
Credit risk models measure the market risk of a portfolio whose value may decline due to adverse movements in interest rates, stock prices, currency values, or commodity prices.
Q:
VaR models are most successful in assessing potential risk when the assets are non-traded.
Q:
VaR models measure the market risk and indicate the potential for losses on a portfolio of assets.
Q:
The largest component of capital among banks is retained earnings.
Q:
Deposits with the Federal Reserve banks are considered to have moderate credit risk and are therefore placed in the 50 percent risk-weight category.
Q:
One of the reasons to regulate the capital position of banks is to limit the risk of bank failures, especially large bank failures.
Q:
Recently, the daily rate at which robberies have occurred in the U.S. has continued to climb.
Q:
The largest source of thrift capital in terms of dollar volume is common stock (par value).
Q:
Equity notes are considered to be part of Tier 1 capital.
Q:
According to recent research, bank stock prices usually drop within a week after a dividend cut is announced.
Q:
If the ratio of tangible equity capital to total assets is 2 percent or less, it is subject to being placed in conservatorship or receivership unless the institution's principal regulator and the FDIC determine that it would be in the public interest to allow the institution to continue under present ownership and management.
Q:
The Basel Agreement on new capital standards, as drafted in the 1980s, failed to deal with market risk.
Q:
Recent research suggests that interest-rate contracts display considerably less risk exposure than do foreign-currency contracts.
Q:
Under the FDIC Improvement Act of 1991, a bank whose leverage ratio drops to 2 percent or less is considered to be critically undercapitalized.
Q:
Under the FDIC Improvement Act of 1991, a U.S. bank possessing a leverage ratio greater than 4 percent would be considered well capitalized.
Q:
The last line of defense against bank failure is owner's capital, according to the textbook.
Q:
Geographic diversification refers to the spreading out credit accounts and deposits among a wide variety of customers within a country, including large and small business accounts, different industries, and households with a variety of sources of income and collateral.
Q:
Portfolio diversification refers to seeking out customers located in different communities or countries, which presumably will experience different economic conditions.
Q:
Off-balance-sheet commitments of banks carry capital requirements under the international (Basel) capital standards.
Q:
Under the international capital (Basel) agreement, Tier 2 capital must be raised to a minimum of 4 percent of risk-weighted assets.
Q:
Core capital includes the surplus value of common stock.
Q:
Under the terms of Basel I, Tier 2 capital includes undivided profits.
Q:
Deposit insurance subsidized by government encourages banks to increase their ratios of capital to deposits.
Q:
One fundamental purpose for regulating capital is to limit losses to the government and other institutions arising from deposit insurance claims.
Q:
According to the textbook, capital and risk are intimately related to each other.
Q:
In the field of banking, capital refers principally to those funds contributed by a bank's owners.
Q:
_________ for banks include assets like mortgage servicing rights and purchased credit card relationships and such assets can be counted as part of bank capital.
Q:
_________ are a type of long-term debt capital whose claims legally follow after the claims of depositors.
Q:
__________ is a hybrid form of debt and equity capital issued to investors.
Q:
_________ are debt securities repayable from the sale of stock.
Q:
_____________ represents funds set aside for contingencies, such as legal action against the institution, as well as providing a reserve for dividends expected to be paid but not yet declared, and a sinking fund to retire stock or debt in the future.