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40 Cards in this Set

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1. Banks with greater capital can do all of the following except:
a. borrow at lower rates.
b. make larger loans.
c. expand faster through acquisitions.
d. expand faster through internal growth
e. Banks with greater capital can do all of the above.
e
2. Community banks are typically considered those banks with assets:
a. over $100 billion.
b. between $50 billion and $99 billion.
c. between $10 billion and $49 billion.
d. between $1 billion and $9 billion.
e. under $1 billion.
e
3. Prior to the Basle Agreement, capital requirements were established without regard to:
a. the bank's liquidity risk.
b. the bank's asset quality.
c. the size of the bank's assets.
d. the bank's operational risk.
e. the bank's interest rate risk.
c
4. Prior to the Basle Agreement, primary capital included all of the following except:
a. long-term subordinated debt.
b. common stock.
c. undivided profits.
d. perpetual preferred stock.
e. the allowance for loan losses.
a
5. Prior to the Basle Agreement, secondary capital included which of the following?
a. The allowance for loan losses
b. Limited-life preferred stock
c. Long-term subordinated debt
d. All of the above
e. b. and c.
b
6. Which of the following was not part of the Basle Agreement?
a. Bank's required capital was linked to its composition of assets.
b. Banks are required to operate with a minimum level of equity.
c. The ownership of equity by banks was prohibited.
d. Capital requirements across countries were standardized.
e. The minimum total capital requirements were set to 8% of risk-adjusted assets.
c
7. Under the current capital requirements, assets in Category 2, such as repurchase agreements, have an effective total capital-to-total-assets ratio of:
a. 1.6%.
b. 2.0%.
c. 4.0%.
d. 8.0%.
e. 8.6%.
a
8. Under the current capital requirements, assets in Category 3, such as 1-4 family real estate loans, have an effective total capital-to-total-assets ratio of:
a. 1.6%.
b. 2.0%.
c. 4.0%.
d. 8.0%.
e. 8.6%.
c
9. Under current capital requirements, Tier 1 Capital takes of all of the following into account except:
a. common stockholder's equity.
b. equity in subsidiaries.
c. goodwill.
d. mandatory convertible debt.
e. non-cumulative perpetual preferred stock.
d
10. Tier 2 capital consists of all of the following except:
a. 30-year subordinated debt.
b. cumulative perpetual preferred stock.
c. mandatory convertible preferred stock.
d. preferred stock with a maturity of 7 years.
e. equity in subsidiaries.
e
11. How much Tier 1 capital does the bank have?
a. $100
b. $450
c. $700
d. $750
e. $1000
Answer: d
In this case, Tier 1 Capital = Common Stock + Surplus + Retained Earnings
Tier 1 Capital = $100 + $300 + $350 = $750
12. The minimum leverage capital for this bank is:
a. $348
b. $450
c. $509
d. $581
e. $696
Answer: b
Minimum Leverage Capital = 3% * (Total Assets – Goodwill) = 3% * ($15,000 - $0) = $450
13. What is the amount of risk-adjusted assets for the bank?
a. $7,700
b. $8,700
c. $9,700
d. $14,700
e. $15,700
b
14. The minimum Tier 1 capital for this bank is:
a. $348
b. $450
c. $509
d. $581
e. $696
Answer: a
Minimum Tier 1 Capital = 4% * Risk-Adjusted Assets = 4% * $8,700 = $348
15. The minimum total capital for this bank is:
a. $348
b. $450
c. $509
d. $581
e. $696
Answer: e
Minimum Total Capital = 8% * Risk-Adjusted Assets = 8% * $8,700 = $696
16. What is the total amount of the bank's regulatory capital?
a. $500
b. $700
c. $750
d. $1,000
e. $1,300
Answer: d
In this case, Total Regulatory Capital = Common Equity + Subordinate Debt = $750 + $250 = $1,000.
17. To be considered well-capitalized, a bank's minimum Tier 1 capital, total capital, and leverage capital must be:
a. 4%, 8%, and 3%, respectively.
b. 8%, 5%, and 3%, respectively.
c. 10%, 10%, and 10%, respectively.
d. 6%, 10%, and 5%, respectively.
e. 3%, 4%, and 8%, respectively.
d
18. To be considered adequately capitalized, a bank's minimum Tier 1 capital, total capital, and leverage capital must be:
a. 4%, 8%, and 3%, respectively.
b. 8%, 5%, and 3%, respectively.
c. 10%, 10%, and 10%, respectively.
d. 6%, 10%, and 5%, respectively.
e. 3%, 4%, and 8%, respectively.
a
19. A bank that does not meet the minimum levels for Tier 1 capital, total capital, and leverage capital ratios is classified as:
a. well-capitalized.
b. adequately capitalized.
c. undercapitalized.
d. significantly undercapitalized.
e. critically undercapitalized.
e
20. How does bank capital reduce bank risk?
a. It provides a cushion for firms to absorb losses.
b. It creates unlimited growth opportunities.
c. It limits access to the financial markets.
d. All of the above.
e. a. and b.
a
21. Why do regulators prefer higher capital requirements?
a. It justifies the existence of regulatory agencies.
b. It better protects the deposit insurance fund.
c. It enhances bank asset quality.
d. It decreases bank profitability.
e. It increases bank leverage.
b
22. Why do banks generally prefer lower capital requirements?
a. To minimize the impact shareholders have on management decisions.
b. To increase the influence of bank regulators.
c. To increase a bank’s return on equity.
d. To increase depositor protection.
e. To maximize operating leverage.
c
23. How do capital requirements constrain bank growth?
a. By discouraging investments in Treasury securities.
b. By disallowing the ownership of mortgage loans.
c. By decreasing a bank’s net interest margin.
d. By limiting the amount of new assets that a bank can acquire through debt financing.
e. By reducing a bank’s CAMELS ratings.
d
24. Which of the following is not a weakness of risk-based capital standards?
a. They ignore interest rate risk.
b. They ignore the value of deposit insurance.
c. They ignore changes in the market value of assets.
d. They ignore credit risk.
e. They ignore the value of a bank's charter.
d
25. Approximately what percentage of commercial banks are currently considered well capitalized at the end of 2007?
a. 97%
b. 87%
c. 77%
d. 67%
e. 57%
a
26. What is the required ROA to support the growth in assets?
a. 0.62%
b. 0.65%
c. 0.68%
d. 0.72%
e. 0.75%
Answer: a

.05 = [ROA*(1-.35) + 0]/.08
.05*.08 = .65ROA
.004/.65 = ROA
ROA = .00615
27. If the bank expects its ROA to be .45%, what is the maximum dividend payout ratio to support the increase in assets?
a. 11.1%
b. 22.2%
c. 33.3%
d. 44.4%
e. 89.9%
Answer: a

.05 = [.0045*(1-DR) + 0]/.08
.004 = [.0045 - .0045DR]
.0045DR = .0045 - .004
DR = .1111 = 11.11%
28. If the bank expects its ROA to be .45% and the bank does not wish to change its dividend payout ratio from 35%, how much new equity capital (as a percent of total assets) must the bank issue to support the growth in assets?
a. 0.001075%
b. 0.01075%
c. 0.1075%
d. 1.075%
e. 10.75%
Answer: c

.05 = [.0045*(1-.35) + ΔEC/TA]/.08
.05 *.08= [.002925 + ΔEC/TA]
.004 - .002925 = ΔEC/TA
ΔEC/TA = .001075
29. For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?
a. Limit asset growth
b. Shrink the bank
c. Increase the dollar amount of commercial loans outstanding
d. Shift more bank assets into lower risk categories.
e. Reprice assets to reflect greater equity support
c
30. Which of the following is true regarding subordinated debt?
a. Subordinated debt claims come before the claims of depositors.
b. Principal payments are not mandatory.
c. Transaction costs on issuing new debt are lower than when issuing new equity.
d. Interest payments on subordinated debt are tax-deductible.
e. New subordinated debt dilutes existing shareholder equity.
d
31. Which of the following is not true regarding common stock?
a. Common stock has no maturity.
b. New issues of common stock may dilute existing shareholder equity.
c. Common stock is a permanent source of funds.
d. Dividends paid are not tax-deductible.
e. Dividends are considered a fixed charge that must be paid.
e
32. Which of the following is a hybrid form of equity that effectively pays dividends that are tax deductible and is considered Tier 1 capital?
a. Common stock
b. Preferred stock
c. Trust preferred stock
d. Leases
e. Trust subordinated debt
c
33. For a bank with deficient capital ratios, which of the following actions could be taken to increase the capital ratios, holding everything else the same?
a. Cut the bank's dividend payment.
b. Increase the bank's burden.
c. Repurchase the bank's common stock on the open market.
d. Increase the bank's growth rate by making additional commercial loans.
e. Reduce the bank's holdings of Treasury securities.
a
34. Which of the following is not a historical problem with deposit insurance?
a. Deposit insurance is a substitute for some functions of bank capital.
b. Some banks are considered Too-Big-To-Fail.
c. Historically, deposit insurance premium levels have been insufficient to cover potential payouts.
d. Historically, deposit insurance premiums were not assessed against all of a bank’s insured liabilities.
e. All of the above are historical problems with deposit insurance.
e
35. The Basel Committee defines operational risk as the risk of loss resulting from:
a. changes in interest rates.
b. changes in inflation.
c. inadequate internal processes.
d. excessive default risk.
e. inadequate capital.
c
36. Decreasing capital increases risk by decreasing financial leverage.

37. In general, bank capital ratios have increased over the last 100 years.
False

False
38. In general, smaller banks have higher capital ratios than larger banks.

39. Regulatory capital ratios focus on the book value of equity.
True

True
40. A significantly undercapitalized bank is one that does not meet the minimum levels for all three capital ratios.

41. An adequately capitalized bank may obtain brokered deposits without FDIC approval.
False

False
42. Under the current risk-based capital requirements, banks must hold capital against standby letters of credit they have issued as guarantees.

43. A bank that holds only U.S. Treasury securities is not required to hold any capital since all the assets are risk-less.
True

False
44. What constitutes Tier 2 capital varies substantially between countries.

45. Smaller banks rely more heavily on internally generated capital than larger banks.
True

True