ch15 Key
1. The risk that has to do with banks trading in foreign currencies is called _________________________.
exchange risk
Rose - Chapter 15 #1
2. The risk that has to do with fraud, embezzlement and bank robberies is called __________________.
crime risk
Rose - Chapter 15 #2
3. _________________________ is measured by the par value of the shares of common equity outstanding.
Common stock
Rose - Chapter 15 #3
4. __________________ is the amount in excess of par value paid by the bank's shareholders.
Surplus
Rose - Chapter 15 #4
5. _________________________ are the net earnings of the bank which have been kept by the bank rather than
distributed as dividends to stockholders.
Undivided Profits (or retained earnings)
Rose - Chapter 15 #5
6. Core capital such as common stock, surplus, undivided profits, qualifying noncumulative preferred stock, etc.
is referred to as __________________ capital as defined by the Basel agreement.
Tier 1
Rose - Chapter 15 #6
7. The international treaty involving the U.S. and 11 other leading industrialized countries to impose common
capital requirements on all banks is known as the _________________________.
Basel Agreement
Rose - Chapter 15 #7
8. Supplemental capital such as the allowance for loan losses, subordinated debt, mandatory convertible debt,
intermediate-term preferred stock, cumulative preferred perpetual stock and equity notes is more commonly
known as _________________________.
Tier 2 capital
Rose - Chapter 15 #8
9. When items on a bank's balance sheet are multiplied by the appropriate risk-weighting factor they are often
called _________________________.
risk-weighted assets
Rose - Chapter 15 #9
10. The fact that a bank may suffer deficiencies in quality control, inefficiencies in producing and delivering of
services, weather damage, aging or faulty computer systems, errors in judgment by management and
fluctuations in economy that could adversely affect the bank's performance is known as
_________________________ risk.
operational
Rose - Chapter 15 #10
11. One defense against risk for the bank is to spread out a bank's credit accounts and deposits among a wide
variety of customers, including large and small accounts different industries, etc. This defense is known as
_________________________.
portfolio diversification
Rose - Chapter 15 #11
12. One defense against risk is for the bank to seek out customers located in different communities or in
different countries. This defense is known as _________________________.
geographic diversification
Rose - Chapter 15 #12
13. When all else fails, the ultimate defense against risk in banking is _________________________.
owners' capital (net worth)
Rose - Chapter 15 #13
14. The largest component of capital among thrift institutions is _____________.
retained earnings
Rose - Chapter 15 #14
15. The largest component of capital among banks is ____________.
surplus
Rose - Chapter 15 #15
16. ____________ models attempt to measure price or market risk of a portfolio of assets and attempt to
determine the maximum loss they might sustain over a designated period of time.
Value at risk (VaR)
Rose - Chapter 15 #16
17. The latest revision to the Basel accord is known as __________ and will be implemented in the year 2008 or
possibly later.
Basel II
Rose - Chapter 15 #17
18. ____________ models measure lender exposure to defaults or credit downgrades.
Credit Risk
Rose - Chapter 15 #18
19. Credit risk models will be ________ widely used when Basel II takes effect.
more
Rose - Chapter 15 #19
20. At the center of the debate of the Basel Agreement is the ___________________________, headquartered
in Basel Switzerland, which assists central banks in their transactions with each other and serves as a forum for
international financial issues.
Bank for International Settlements (BIS)
Rose - Chapter 15 #20
21. _______________________________ 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.
Equity reserves
Rose - Chapter 15 #21
22. ________________________________________ are debt securities repayable from the sale of stock.
Equity commitment notes
Rose - Chapter 15 #22
23. ________________________________________ is a hybrid form of equity capital issued to investors
through a trust company, The funds raise are loaned to the financial firm. Dividends paid to stockholders on this
time of capital are tax deductible.
Trust preferred stock
Rose - Chapter 15 #23
24. _________________________ is long-term debt capital whose claims legally follow claims of depositors.
Subordinated notes and debentures
Rose - Chapter 15 #24
25. _____________________________________ for banks include mortgage servicing rights and purchased
credit card relationships and can be counted as part of bank capital.
Identifiable intangible assets
Rose - Chapter 15 #25
26. According to the textbook the role of capital is to:
A. Provide a cushion against failure risk.
B. Provide funds needed to organize, open, and operate a bank.
C. Promote public confidence
D. Support growth and the development of new services
E. All of the above.
Rose - Chapter 15 #57
27. 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 above.
Rose - Chapter 15 #58
28. 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 above.
Rose - Chapter 15 #59
29. The fundamental purposes of regulating bank capital cited in the textbook include which of the following?
A. To limit the risk of bank failures.
B. To preserve public confidence in banks.
C. To limit losses to the federal government arising from insurance claims.
D. All of the above.
E. A and B only.
Rose - Chapter 15 #60
30. 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 above.
Rose - Chapter 15 #61
31. 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 above
Rose - Chapter 15 #62
32. Possible breakdowns in quality control, inefficiencies in producing and delivering financial services,
weather damage, aging or faulty computer systems and simple 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 above
Rose - Chapter 15 #63
33. The ratio of core capital to average assets is called the:
A. Supplemental Capital ratio
B. Leverage ratio
C. Long-term capital ratio
D. GAAP capital ratio
E. None of the above.
Rose - Chapter 15 #64
34. The risk that a customer the bank has entered into a contract with will fail to pay or to perform, forcing the
bank to find a replacement contract 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
Rose - Chapter 15 #65
35. If a bank benefits when a foreign currency declines in value, then the bank must be in a __________
position. The term below that correctly fills in the blank in the preceding sentence is:
A. Long
B. Short
C. Negative
D. Credit risk
E. None of the above
Rose - Chapter 15 #66
36. 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 above
Rose - Chapter 15 #67
37. 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 above
Rose - Chapter 15 #68
38. A "well capitalized" bank in the United States must have a leverage ratio of at least:
A. 5 percent
B. 4 percent
C. 6 percent
D. 8 percent
E. None of the above
Rose - Chapter 15 #69
39. A bank has $100 million in assets in the 0 percent risk weight category, $200 million in assets in the 20
percent risk weight category, $500 million in assets in the 50 percent risk weight category and $750 million in
assets in the 100 percent risk weight category. This bank has $57 million in core (Tier 1) capital. What is this
bank's ratio of Tier 1 capital to risk-weighted assets?
A. 3.68 percent
B. 7.6 percent
C. 18.25 percent
D. 5.48 percent
E. None of the above
Rose - Chapter 15 #70
40. 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. 6.6 percent
B. 3.96 percent
C. 7.2 percent
D. .33 percent
E. None of the above
Rose - Chapter 15 #71
41. Which of the following would be an example of Tier 1 capital?
A. Subordinated debt capital instruments with an original maturity of at least 5 years
B. Allowance for loan and lease losses
C. Minority interest in the equity accounts of consolidated subsidiaries
D. Intermediate term preferred stock
E. All of the above
Rose - Chapter 15 #72
42. Which of the following would be an example of crime risk?
A. A bank manager that 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 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 above are examples of crime risk
Rose - Chapter 15 #73
43. Which of the following assets fits into the 0 percent risk weight category?
A. Cash
B. Deposits at the Federal Reserve
C. Treasury Bills
D. Short term loan commitment
E. All of the above fit into the 0 percent risk weight category
Rose - Chapter 15 #74
44. A bank that is 'well-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 it its capital level is not increased within a certain time
limit.
E. None of the above
Rose - Chapter 15 #75
45. A bank that is 'critically undercapitalized':
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 it its capital level is not increased within a certain time
limit.
E. None of the above
Rose - Chapter 15 #76
46. 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 it its capital level is not increased within a certain time
limit.
E. None of the above
Rose - Chapter 15 #77
47. 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 above
Rose - Chapter 15 #78
48. Which of the following is in the 50 percent risk-weight (moderate) category?
A. Cash
B. General Obligation Municipal Bonds
C. Residential Mortgage Loans
D. Credit Card Loans
E. None of the above
Rose - Chapter 15 #79
49. Which of the following is in the 20 percent risk-weight (low) category?
A. Cash
B. General Obligation Municipal Bonds
C. Residential Mortgage Loans
D. Credit Card Loans
E. None of the above
Rose - Chapter 15 #80
50. 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 percent
E. None of the above
Rose - Chapter 15 #81
51. 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 $1000 million in assets in the 50 percent risk-weight category and has
$1000 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?
A. 6.08 percent
B. 3.04 percent
C. 9.11 percent
D. 5.54 percent
E. None of the above
Rose - Chapter 15 #82
52. 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 $1000 million in assets in the 50 percent risk-weight category and has
$1000 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?
A. 6.08 percent
B. 3.04 percent
C. 9.11 percent
D. 5.54 percent
E. None of the above
Rose - Chapter 15 #83
53. 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 $1000 million in assets in the 50 percent risk-weight category and has
$1000 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 above
Rose - Chapter 15 #84
54. 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. 4.8 percent
E. None of the above
Rose - Chapter 15 #85
55. The revised Basel I rules impose 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
Rose - Chapter 15 #86
56. Bank debt which appears to be highly sensitive to the market perception of the bank's risk is which of the
following?
A. deposits
B. fed funds
C. repos
D. subordinated debt capital
E. preferred stock
Rose - Chapter 15 #87
57. Bank operational risk includes:
A. employee fraud
B. account errors
C. computer breakdowns
D. natural disasters
E. all of the above
Rose - Chapter 15 #88
58. The issue of correctly adding up all of the different types of bank risk exposure is known as:
A. risk tallying
B. summing risk
C. risk aggregation
D. risk accumulation
E. risk totality
Rose - Chapter 15 #89
59. Basel II has a different set of rules for different bank size categories and the number of categories is:
A. two
B. three
C. four
D. five
E. ten
Rose - Chapter 15 #90
60. 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 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 above are examples of exchange risk
Rose - Chapter 15 #91
61. 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 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 above are examples of credit risk
Rose - Chapter 15 #92
62. 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 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 above are examples of interest rate risk?
Rose - Chapter 15 #93
63. Which of the following would be an example of operational 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 loan the bank has made has been deemed uncollectable
E. None of the above are examples of operational risk
Rose - Chapter 15 #94
64. 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 loan the bank has made has been deemed uncollectable
E. None of the above are examples of liquidity risk
Rose - Chapter 15 #95
65. 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 acting as a derivatives trader is also the one who writes the reports on profits and losses in
derivatives trading at the end of each 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 above are examples of operational risk
Rose - Chapter 15 #96
66. 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. All of the above
Rose - Chapter 15 #97
67. 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. All of the above
Rose - Chapter 15 #98
68. 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. All of the above
Rose - Chapter 15 #99
69. 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. All of the above
Rose - Chapter 15 #100
70. What type of preferred stock has become popular among large banks in recent years, partly because
dividends paid are tax deductible for the issuing institution?
A. Cumulative preferred stock
B. Noncumulative preferred stock
C. Convertible preferred stock
D. Trust preferred stock
E. All of the above
Rose - Chapter 15 #101
71. Even if individual banks are good at forecasting risk using VAR models there may still be problems because
losses may occur at several banks at the same time due to the interdependency of the financial system,
magnifying each bank's risk exposure and possibly causing a major problem for regulators. The book calls this:
A. Systematic risk
B. Operational risk
C. Credit risk
D. Market risk
E. Liquidity risk
Rose - Chapter 15 #102
72. There are three pillars of Basel II. One of them wants to make market discipline a powerful force
compelling risky banks to lower their risk exposure. What does Basel II want to do to make this happen?
A. Require minimum capital requirement based on the bank's own evaluation of its risk
B. Require greater public disclosure of each bank's true financial condition
C. Expand the risks to be evaluated to include credit risk, market risk and operational risk
D. Require supervisory review of each bank's risk evaluation procedures
E. All of the above
Rose - Chapter 15 #103
73. A bank has capital to risk weighted assets of 11.5%, Tier 1 capital to risk weighted assets of 7.2% and a
leverage ratio of 5.8%. What type of bank is this?
A. Well capitalized
B. Adequately capitalized
C. Undercapitalized
D. Significantly undercapitalized
E. Critically undercapitalized
Rose - Chapter 15 #104
74. A bank has capital to risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 5% and a
leverage ratio of 4.8%. What type of bank is this?
A. Well capitalized
B. Adequately capitalized
C. Undercapitalized
D. Significantly undercapitalized
E. Critically undercapitalized
Rose - Chapter 15 #105
75. A bank has capital to risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 4.5% and a
leverage ratio of 3.7%. What type of bank is this?
A. Well capitalized
B. Adequately capitalized
C. Undercapitalized
D. Significantly undercapitalized
E. Critically undercapitalized
Rose - Chapter 15 #106
76. A bank has capital to risk weighted assets of 5.5%, Tier 1 capital to risk weighted assets of 2.8% and a
leverage ratio of 2.6%. What type of bank is this?
A. Well capitalized
B. Adequately capitalized
C. Undercapitalized
D. Significantly undercapitalized
E. Critically undercapitalized
Rose - Chapter 15 #107
77. A bank has capital to risk weighted assets of 1.8%. What type of bank is this?
A. Well capitalized
B. Adequately capitalized
C. Undercapitalized
D. Significantly undercapitalized
E. Critically undercapitalized
Rose - Chapter 15 #108
78. A bank has decided to retain more of their earnings, moving their retention ratio from 40% to 70%. What
way of meeting their capital needs is the bank taking?
A. Changing their dividend policy
B. Issuing common stock
C. Issuing preferred stock
D. Issuing subordinated notes and debentures
E. Selling assets and leasing facilities
Rose - Chapter 15 #109
79. The First National Bank of Tucson has determined that the value of their property in Tucson has tripled in
the last three years. They decide that they would like to use this property to raise funds and will rent space from
the new owners of the building. What way of meeting their capital needs is the bank taking?
A. Issuing common stock
B. Issuing preferred stock
C. Issuing subordinated notes and debentures
D. Selling assets and leasing facilities
E. Swapping stock for debt instruments
Rose - Chapter 15 #110
80. The Second National Bank of Lincoln has decided that to raise funds it is going to issue new common
equity through a pre-emptive rights offering so that current owners will not have that ownership diluted. What
way of meeting their capital needs is the bank taking?
A. Issuing common stock
B. Issuing preferred stock
C. Issuing subordinated notes and debentures
D. Selling assets and leasing facilities
E. Swapping stock for debt instruments
Rose - Chapter 15 #111
81. The Third State Bank of Denton has decided to issue stock through a trust company and borrow the funds
from the trust company. This stock pays a fixed dividend and because of the way the stock has been issued it is
tax deductible. What way of meeting their capital needs in the bank taking?
A. Issuing common stock
B. Issuing preferred stock
C. Issuing subordinated notes and debentures
D. Selling assets and leasing facilities
E. Swapping stock for debt instruments
Rose - Chapter 15 #112
82. The Northwest Bank of Charlotte has decided to issue new securities that have five years to maturity that
have claims to assets that follow the claims of depositors. What way of meeting their capital needs is the bank
taking?
A. Issuing common stock
B. Issuing preferred stock
C. Issuing subordinated notes and debentures
D. Selling assets and leasing facilities
E. Swapping stock for debt instruments
Rose - Chapter 15 #113
83. A bank has issued $5,000,000 in long term debt and since that time interest rates have risen so that it will
only cost the bank $3,000,000 to buy the long term debt back. The bank decides to issue $3,000,000 in new
stock and use the proceeds to retire the long term debt. What way of meeting their capital needs is the bank
taking?
A. Issuing common stock
B. Issuing preferred stock
C. Issuing subordinated notes and debentures
D. Selling assets and leasing facilities
E. Swapping stock for debt instruments
Rose - Chapter 15 #114
ch15 Summary
Category
# of Questions
Rose - Chapter 15
83