Topic 57 to 60 Test ID: 9500959

Question #1 of 31 Question ID: 440435

Banks must implement a stress testing program under the Basel III standards. Which of the following elements would not be
included in this program?

A) Multi-factor scenarios to test non-directional risk should be performed quarterly. These tests might
include yield curve exposure, basis risk, and so on.

B) Banks should conduct reverse stress tests to identify extreme but plausible scenarios.
C) Stress testing should be integrated into the overall risk management plan and reported to senior
management.

D) Exposure stress testing must be performed at least annually.

Question #2 of 31 Question ID: 440441

Which of the following statements most likely describes the minimum liquidity coverage ratio (LCR)?

A) LCR requires that banks have enough high-quality liquid assets to fully cover total net cash outflows
over the next month.
B) LCR promotes a sustainable maturity structure for assets and liabilities by creating incentives for
banks to use more stable funding sources.
C) The goal of the LCR is to protect banks over a longer time horizon than the net stable funding ratio.
D) The goal of the LCR is to make banks less resilient to liquidity shocks in the short-run.

Question #3 of 31 Question ID: 440433

What is the overall limit on Tier 2 Capital? Tier 2 Capital is limited to:

A) 50% of Tier 1 Capital.

B) 75% of Tier 1 Capital.
C) 150% of Tier 1 Capital.
D) 100% of Tier 1 Capital.

Question #4 of 31 Question ID: 440437

With respect to external credit assessment institutions (ECAIs), banks may:

A) Change the use of ECAIs at will.

B) Use ECAIs that make publicly available their procedures and methodologies used to rate issues.

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 C) Choose not to follow the rating for risk-weighting purposes if the rating is lower than the bank
believes it should be.

D) Use separate ECAIs for risk management and for the risk-weighting of assets for capital purposes.

Question #5 of 31 Question ID: 444848

Under the Basel II market risk framework, capital charges for specific risk and market risk are:

A) 20-day value at risk measure at the 99.9% confidence level for specific risk and 10-day value at risk
measure at the 99% confidence level for market risk.

B) 10-day value at risk measure at the 95% confidence level for specific risk and 20-day value at risk
measure at the 99% confidence level for market risk.

C) 20-day value at risk measure at the 99.9% confidence level for specific risk and market risk.
D) 10-day value at risk measure at the 99% confidence level for specific risk and market risk.

Question #6 of 31 Question ID: 440436

Widening counterparty credit spreads often result in:

A) decreases in exposure at default.

B) liquidity shocks.
C) mark-to-market credit valuation adjustments.
D) regulatory adjustments to capital measures at individual institutions.

Question #7 of 31 Question ID: 444849

Qualitative disclosures for the incremental risk capital (IRC) charge in the context of internal models should include
methodologies and approaches used by the bank to determine:

A) liquidity levels during model validation, only.

B) time horizons during the process of assessing capital requirements, only.
C) liquidity levels and time horizons, during model validation and during the process of assessing capital
requirements.

D) liquidity levels and time horizons, during model validation, only.

Question #8 of 31 Question ID: 440432

Which of the following is NOT a requirement of Tier 3 capital?

A) Unsecured subordinated debt.

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 B) Issued with a maturity of at least 3 years.
C) Debt must have a covenant to protect the ability to preserve the capital requirement.
D) Short-term, not long-term.

Question #9 of 31 Question ID: 440446

Assume the following information for Bank XYZ:

• Previous stressed VAR = 100
• Multiplication factor (M) = 3
• Stressed VAR average over the previous 60 trading days = 50

Which of the following values is the correct stressed VAR amount for this bank?

A) 150.
B) 100.
C) 300.
D) 30.

Question #10 of 31 Question ID: 440434

The goal of the Basel III framework is to:

A) Improve the resiliency of the banking sector.

B) Eliminate OTC derivatives trading by regulated banks.
C) Reduce excessive liquidity in the banking sector.
D) Improve banking supervision.

Question #11 of 31 Question ID: 440440

Fundamental characteristics of high-quality liquid assets include all of the following except:

A) Listed on a recognized exchange.

B) Easy to compute value.
C) High credit standing of the issuer and high market risk.
D) Low correlation with risky assets.

Question #12 of 31 Question ID: 444846

Which of the following statements is least likely applicable to assets considered high quality liquid assets (HQLA)?

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 A) HQLA assets received through rehypothecation are never eligible for HQLA status.
B) Market risk of HQLA assets must be hedgeable.
C) HQLA assets should not have claims against them.
D) HQLA assets that become ineligible due to a ratings downgrade must be replaced within 30 days.

Question #13 of 31 Question ID: 440425

Tier 3 capital is allowed by the Basel Accord to cover:

I. legal risks.
II. credit risks.
III. market risks.
IV. operational risks.

A) I, II, and IV.

B) III only.
C) II and III only.
D) I and II only.

Question #14 of 31 Question ID: 440427

Tier 1 capital is composed of all of the following EXCEPT:

A) non-cumulative perpetual shares.

B) minority equity interest.
C) cumulative perpetual shares.
D) common equity.

Question #15 of 31 Question ID: 444847

Basel Level 2B assets such as residential mortgage-backed securities must not comprise more than:

A) 15% of total HQLA after accounting for haircuts.

B) 40% of total HQLA before accounting for haircuts.

C) 15% of total HQLA before accounting for haircuts.

D) 40% of total HQLA after accounting for haircuts.

Question #16 of 31 Question ID: 440445

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Bank regulators require a specific relationship among the market risk factors used in the pricing process. Which of the following
statements is least accurate?

A) A bank should consider foreign exchange risk factor if it has significant exposure to a particular
foreign currency.
B) With respect to pricing based on interest rates, regulators require banks to model yield curves.
C) In the equity pricing area, market risk factors include market-wide movements in equity prices and
price changes in industry sectors.
D) For commodity price risk, correlation risk and basis risk should be captured for limited or aggregate
positions.

Question #17 of 31 Question ID: 440447

Lisa and Julian are working for an investment banking firm. Recently they discussed at length the implications of revisions to the
Basel II market risk framework for estimating capital charge. Which of the following comments made by Lisa regarding her
understanding of Basel II revisions are NOT correct?
I. Bank positions subject to deductions are excluded when estimating capital charge for specific risk.
II. Market risk factors used in the pricing of a bank's positions for estimating capital charge include interest rate risk, foreign
exchange risk, commodity price volatility, and fluctuations in equity market index.
III. Regulators require that the market risk factors used for pricing of a bank's positions should not be included in the calculation
of the VAR model.
IV. Market risk capital (MRC) is the product of both the VAR and stressed VAR (SVAR).

A) I, II and III.
B) I, II, III and IV.
C) II, III and IV.

D) I, III and IV.

Question #18 of 31 Question ID: 444844

Which statement is least accurate about the countercyclical regime that is being implemented in 2016 to dampen procyclical
amplification of financial shocks?

A) Banks must calculate and publically disclose the countercyclical buffer in the same frequency as
their minimum capital requirements.
B) International banks will only be subject to the buffer requirement in their home country.
C) The buffer will be between 0% and 2.5% of risk-weighted assets.
D) Banks will be given up to 12 months to meet the new requirements.

Question #19 of 31 Question ID: 440431

What is the best definition of Tier 1 regulatory capital?

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 A) Long-term debt and revaluation reserves.
B) Subordinated debt and undisclosed reserves.
C) Equity capital and subordinated debt with a maturity greater than 5 years.
D) Equity capital, retained earnings, and disclosed reserves.

Question #20 of 31 Question ID: 440443

An important objective of the revisions to the Basel II Market Risk Framework would include:

A) elimination of the backtest.

B) exclusion of the pricing factor.
C) alteration in the stressed value-at-risk computation.
D) taking incremental risk into consideration.

Question #21 of 31 Question ID: 440439

Ideally, liquid assets should be central bank eligible. There are two categories of assets: (1) Level I assets, which can be
included without limit; and (2) Level II assets, which may only comprise 40% of the high-quality stock. Which of the following
items is mostly likely a Level II asset?

A) Central bank reserves.

B) Non-0% risk-weighted sovereign or central bank securities.
C) Cash.
D) Marketable securities assigned a 20% risk-weighting.

Question #22 of 31 Question ID: 440426

Tier 1 and tier 2 capital requirements differ from tier 3 capital requirements in that tier 1 and tier 2 are associated with:

A) credit-risk charges.
B) market-risk charges.

C) exchange-risk charges.
D) interest-rate risk charges.

Question #23 of 31 Question ID: 440449

Revision to the Basel II market risk framework requires banks to establish and uphold procedures for computing adjustments to
the current value of illiquid securities. A bank's ability to sell or hedge less liquid positions may not be supported by assumptions
made abut liquidity within the market risk capital charge due to unforeseen market events. As a result, a valuation adjustment is
needed on a regular basis in order to precisely determine a positions current illiquidity status. This adjustment is made regardless

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of whether the position is marked to market, marked to model, or obtained through third-party valuation. Which of the following
factors are considered when determining the accuracy and suitability of the adjustment for illiquid positions?
I. Market concentrations.
II. Average volatility of the bid-ask spread.
III. Average trading volume.
IV. Age of the positions.

A) I, III and IV.

B) I, II and III.
C) II, III and IV.
D) I, II, III and IV.

Question #24 of 31 Question ID: 440428

The balance sheet for James Bankholdings as of December 31, 2004 included the following items ($000):

Preferred Stock (noncumulative) $800,000

Common Stock $1,200,000
Retained Earnings $3,000,000
Unrealized gains on long term Equity holdings $750,000

Based only on this information, estimate the Tier 1 and Tier 2 capital of James Bankholdings as of 12/31/04 (use $000):

Tier 1 Tier 2

A) $4,200,000 $1,550,000

B) $5,000,000 $0

C) $5,000,000 $750,000

D) $4,200,000 $800,000

Question #25 of 31 Question ID: 440448

Qualitative and quantitative disclosures for the incremental risk capital charge should include which of the following?
I. Methodologies and approaches by the bank to determine liquidity levels and horizons.
II. Liquidity levels and horizons should be estimated during model validation and also during the process of assessing capital
requirements.
III. Quantitative disclosures for trading portfolios under IMA approach should report the values of VAR, SVAR, and IRC.
IV. Back testing critical outliers and trading portfolio gains/losses (in comparisons to VAR estimates) should be reported.

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 A) I, II and III.
B) I, III and IV.
C) I, II, III and IV.
D) II, III and IV.

Question #26 of 31 Question ID: 440429

Which of the following securities is included in Tier 1 capital?

I. Common equity.
II. Subordinated debt.
III. Hybrid instruments.
IV. Cumulative perpetual preferred stock.

A) I only.
B) I and IV only.
C) I and II only.
D) I, II, III, and IV.

Question #27 of 31 Question ID: 440430

Tier 3 capital can be used to satisfy capital requirements resulting from:

A) credit-risk charges only.

B) only certain types of credit-risk charges.
C) market-risk and credit-risk charges.
D) market-risk charges only.

Question #28 of 31 Question ID: 440444

The objective of the revision to the Basel II market risk framework is to further improve bank models by incorporating additional
risk factors in pricing securities and estimating capital charge. These revisions represent an update to the practice of accounting
for trading book positions and offer guidelines to estimate capital charge for specific risk and general market risk. Stressed Value
at Risk (SVAR) should be:

A) calculated on a monthly basis.

B) based on a 30- day interval.
C) based on a 99% confidence interval.
D) based on current portfolio performance data only.

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Question #29 of 31 Question ID: 440438

A liquidity measure that is intended to measure a bank's resilience over a 30-day horizon is:

A) Net Stable funding sources ratio.

B) Bail-in debt ratio.
C) Leverage concentration ratio.
D) Liquidity coverage ratio.

Question #30 of 31 Question ID: 440442

The contractual maturity mismatch identifies the amount of liquidity a bank may need to raise in a specific time band, assuming all
outflows occur at the earliest possible date. Which of the following statements incorrectly identifies a practical application of the
metric?

A) The model is based on contractual flows with no behavioral assumptions.

B) Banks and supervisors must recognize that it is currently impossible to identify the actual funding
counterparty for many types of debt.

C) Banks must identify how they plan to address liquidity gaps generated by maturity mismatches.
D) Banks should also apply behavioral assumptions to inflows and outflows and should consider both
normal and stressed conditions.

Question #31 of 31 Question ID: 444845

Global policymakers intending to improve the handling of systemic risk would least likely consider:

A) contingent capital structures for banks with eroding capital positions.

B) capital surcharges on systemically important institutions.
C) lower capital requirements for banks that facilitate large derivatives trades.

D) bail-in debt structures for banks with that have breached certain capital ratios.

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