Lecture 6

What do you think is the main argument against book value accounting?

• Banks have incentive to defer write-downs (losses)

• Banks face high earnings volatility and then high risk

• Banks are reluctant to adopt book value accounting

• Regulators postpone action against banks with low capital

What do you think is the main argument against market value accounting?

• It is difficult to implement

• Banks face higher earning volatility with risk of premature closure

• Banks’ investment is biased towards short-term assets

• All of the above (almost equally)

In the Basel Agreements, what Pillar 2 and Pillar 3 specify respectively?

• Credit risk and market discipline

• Credit risk and regulatory process

• Regulatory process and market discipline

• All of the above

A bank has the following balance sheet:

Assets (total $215):

Cash $5, T-bill $5, Mortgages $85, Loans $120

Liabilities (total $215):

Deposits $200, subordinated debt $10, equity (core = Tier I) $5

Off-balance-sheet:

Unused loan commitment less 1 year $50, u-l-c more 1 year $30

What is the leverage ratio L?

• L = 2,24%

• L = 2,72%

• L = 2,41%

• L = 2,32%

A bank has the following balance sheet:

Assets (total $215):

Cash $5, T-bill $5, Mortgages $85, Loans $120

Liabilities (total $215):

Deposits $200, subordinated debt $10, equity (core = Tier I) $5

Off-balance-sheet:

Unused loan commitment less 1 year $50, u-l-c more 1 year $30

What is the Tier I risk-based capital ratio?

• T-I CR = 2,66%

• T-I CR = 2,55%

• T-I CR = 2,42%

• T-I CR = 2,79%

A bank has the following balance sheet:

Assets (total $215):

Cash $5, T-bill $5, Mortgages $85, Loans $120

Liabilities (total $215):

Deposits $200, subordinated debt $10, equity (core = Tier I) $5

Off-balance-sheet:

Unused loan commitment less 1 year $50, u-l-c more 1 year $30

What is the Total risk-based capital ratio?

• T CR = 9%

• T CR = 7%

• T CR = 8%

• T CR = 6%

The previous bank has L=2.32%, T-I CR = 2,66% and T CR = 8%. How would the regulator classify the bank in term of capital adequacy?

• Adequately capitalized

• Undercapitalized

• Significantly undercapitalized

• It depends on the measure

A bank has the following balance sheet:

Assets (total $215):

Cash $5, T-bill $5, Mortgages $85, Loans $120

Liabilities (total $215):

Deposits $200, subordinated debt $10, equity (core = Tier I) $5

Off-balance-sheet:

Unused loan commitment less 1 year $50, u-l-c more 1 year $30

Basel II allowed to use “internal rating based” models to estimate asset risk. The bank’s IRB model estimates a risk weight of 0.1 for mortgages and 0.75 for business loans. What is the Tier I risk-based capital ratio?

• T-I CR = 3,67%

• T-I CR = 4,04%

• T-I CR = 5,33%

• T-I CR = 3,16%