Question 1

Which of the following would be an example of credit risk?

Accepted Answer

Credit risk is the risk that a borrower will default or fail to meet their obligations. Option C describes a loan on which no interest or principal has been collected in 2 years, indicating that the borrower may be having trouble making payments and thus represents credit risk. Options A and B describe operational risk and market risk respectively. Option D relates to interest rate risk. Therefore, option C is the best choice for credit risk.

Question 2

Which of the following would be an example of interest rate risk?

Accepted Answer

Interest rate risk refers to the potential for changes in interest rates to affect the value of an investment or financial instrument. In this case, the bank manager's prediction of rising interest rates was incorrect, leading to a decrease in the bank's net income.

Question 3

Which of the following would not be an example of operational risk?

Accepted Answer

A bank robbery is an example of criminal or security risk, not operational risk which pertains to the risks arising from internal and external operational failures such as process breakdowns, system failures, human error, or fraud. The other options all involve operational risk.

Question 4

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 Tier 1 capital to risk assets?

Accepted Answer

The risk-weighted assets are calculated as follows:  0% of $200 million = $0 million  20% of $400 million = $80 million  50% of $1,000 million = $500 million  100% of $1,000 million = $1,000 million  Total risk-weighted assets = $0 + $80 + $500 + $1,000 = $1,580 million  The Tier 1 capital is $96 million.  The ratio of Tier 1 capital to risk-weighted assets = ($96 million / $1,580 million) * 100 = 6.08%.

Question 5

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?

Accepted Answer

The internal capital growth rate (g) can be calculated using the formula:

g = b * ROE

where b is the retention rate and ROE is the return on equity.

ROE can be calculated using the DuPont model:

ROE = Net Profit Margin * Asset Utilization Ratio * Equity Multiplier

Substituting the given values:

ROE = 0.0525 * 0.45 * 12 = 2.835

b = 0.4

Therefore,

g = 0.4 * 2.835 = 1.134 = 11.34%

So, the correct answer is C.

Question 6

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?

Accepted Answer

Cutting the bank's dividend payment would reduce the amount of money paid out to shareholders and increase the bank's retained earnings, which would increase the bank's capital ratios.

B, C, and D would all decrease the bank's capital ratios. 
Increasing the bank's leverage would increase its risk and reduce its capital ratios. 
Reducing the bank's holdings of cash would decrease its liquidity and potentially increase its risk, which would reduce its capital ratios. 
Increasing the bank's growth rate by making additional commercial loans would increase its risk and reduce its capital ratios. 
Reducing the bank's holdings of Treasury securities would reduce its liquidity and potentially increase its risk, which would reduce its capital ratios.

Question 7

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?

Accepted Answer

The total risk-weighted assets of the bank can be calculated as follows:

Total risk-weighted assets = (0% risk-weighted assets) + (20% risk-weighted assets * 0.20) + (50% risk-weighted assets * 0.50) + (100% risk-weighted assets)

Total risk-weighted assets = $200 million + $80 million + $500 million + $1000 million

Total risk-weighted assets = $1780 million

The total capital of the bank is the sum of Tier 1 and Tier 2 capital:

Total capital = Tier 1 capital + Tier 2 capital

Total capital = $96 million + $48 million

Total capital = $144 million

Finally, we can calculate the ratio of total capital to risk-weighted assets:

Ratio of total capital to risk-weighted assets = (Total capital / Total risk-weighted assets) * 100%

Ratio of total capital to risk-weighted assets = ($144 million / $1780 million) * 100%

Ratio of total capital to risk-weighted assets = 8.09%

Therefore, the best choice is C) 9.11 percent, which is the closest option to the calculated ratio of 8.09%.

Question 8

The revised Basel I rules imposed capital requirements for market risk on:

Accepted Answer

The answer of The revised Basel I rules imposed capital...

Question 9

Which of the following would be an example of operational risk?

Accepted Answer

Operational risk refers to the risk of loss due to inadequate or failed internal processes, people, and systems, or from external events. In this case, an out-of-date computer system causing the bank to lose $750,000 is an example of operational risk. The other options involve credit risk or theft, which are not operational risks.

Question 10

Which of the following is in the 20 percent risk-weight (low credit risk)category?

Accepted Answer

General obligation municipal bonds are considered to have low credit risk and fall under the 20 percent risk-weight category according to regulatory guidelines.

Question 11

Basel II had a different set of capital rules for different banks,and the number of categories is:

Accepted Answer

The answer of Basel II had a different set of...

Question 12

Which of the following is in the 50 percent risk-weight (moderate credit risk)category?

Accepted Answer

Residential mortgage loans are typically assigned a 50% risk weight under the standardized approach for credit risk in banking regulations, reflecting their moderate credit risk.

Question 13

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?

Accepted Answer

The Jennings Bank of Texas is using portfolio diversification as a defense against credit risk by making loans to a variety of customers in different sectors such as corporate, residential, agriculture, small business, and automobile. By diversifying its portfolio, the bank can spread its risk across different types of loans and reduce its overall exposure to credit risk. This strategy can help to minimize the potential losses from loan defaults and ensure the long-term sustainability of the bank.

Question 14

As per the Basel Committee,a bank's operational risk includes:

Accepted Answer

The Basel Committee includes all of the options as operational risks for banks. Operational risk arises from the potential of inadequate or failed internal processes, people or systems, or external events. Employee fraud, accounting errors, computer breakdowns, and natural disasters are all examples of operational risks that banks face. Therefore, option E is the correct answer.

Question 15

The task of correctly adding up all of the different types of bank risk exposures is known as:

Accepted Answer

Risk aggregation is the process of consolidating all of a bank's various risk exposures and assessing the overall level of risk. This can involve combining data from different departments, such as credit risk, market risk, and operational risk, and synthesizing it into a comprehensive view of the bank's risk profile. The other answer choices are not commonly used industry terms for this task.

Question 16

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?

Accepted Answer

The equity capital to total assets ratio can be calculated using the formula: ROE = ROA * (Total Assets/Equity). Rearranging gives Equity/Total Assets = ROA/ROE = 2%/14% = 0.1429 or 14.29%.

Question 17

Which of the following is a bank debt that appears to be highly sensitive to the market perception of the bank's risk?

Accepted Answer

Subordinated debt capital is considered to be highly sensitive to the market perception of the bank's risk as it is a type of debt that is lower in priority compared to other debts. Therefore, investors may perceive higher risk in the bank and demand higher yields, resulting in the sensitivity of subordinated debt capital to market perception. Deposits, Fed funds, repos, and preferred stock are not considered highly sensitive to market perception.

Question 18

Which of the following would be an example of liquidity risk?

Accepted Answer

Liquidity risk refers to the risk of a bank not having enough cash or liquid assets on hand to meet depositors' or creditors' demands for withdrawals or payments. In option C, the bank is forced to sell loans in order to meet the needs of depositors, which shows a lack of liquidity and is an example of liquidity risk. The other options are examples of other types of risk such as fraud risk (A), operational risk (B), credit risk (D), but not liquidity risk.

Question 19

Which of the following would be an example of exchange risk?

Accepted Answer

Exchange risk, also known as currency risk, refers to the potential for loss in value when trading in foreign currencies. Option B is the only example that involves trading in foreign currencies and losing money as a result. The other options involve embezzlement, non-payment of a loan, and interest rate fluctuations, all of which may present operational or credit risk but not exchange risk.

Question 20

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 Tier 2 capital to risk assets?

Accepted Answer

To calculate the ratio of Tier 2 capital to risk-weighted assets, first calculate the risk-weighted assets: (0% of $200M) + (20% of $400M) + (50% of $1,000M) + (100% of $1,000M) = $0M + $80M + $500M + $1,000M = $1,580M. The Tier 2 capital is $48M. The ratio is ($48M / $1,580M) * 100 = 3.04%.

Quiz 15: The Management of Capital