Topic 50 to 54 Test ID: 9500864

Question #1 of 39 Question ID: 440288

How many of the following statements about economic capital are CORRECT?
Banks set aside economic capital in anticipation of expected losses.
Banks keep reserves to provide a cushion against unexpected losses.
Banks should set economic capital at 100% confidence level.
Economic capital provides various stakeholders of an institution with a degree of confidence that their invested funds are
safe.

A) 2.
B) 1.
C) 3.
D) 4.

Question #2 of 39 Question ID: 440296

Based on the current credit rating and the maturity of a loan, the capital factor is determined to be 4.5%. What is the credit
capital charge if the market value of the position is $2 million?

A) $444,444.
B) $90,000.
C) $470,000.
D) $64,000.

Question #3 of 39 Question ID: 440287

The primary purpose of operational risk economic capital is to:

A) protect the company against insolvency due to unexpected operational losses.

B) meet regulatory guidelines.

C) meet financial reporting requirements.

D) protect the company against insolvency due to expected and unexpected operational losses.

Question #4 of 39 Question ID: 440350

One of the challenges of designing useful stress tests is coherence. Which of the following statements is incorrect regarding
coherence in modeling risk factors during the stress testing of banks?

A) It is very difficult to find coherent outcomes in a complex, multi-dimensional universe.

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 B) The problem is great when designing stress scenarios for marked-to-market portfolios of traded
securities and derivatives.
C) The sensitivities and scenarios must be reasonable or possible, and not too extreme.
D) Problems are inherently multi-factored, making it more difficult to design a coherent stress test.

Question #5 of 39 Question ID: 444841

Successfully mapping broad economic factors to specific intermediate risk factors can help a bank predict losses across:

A) specific products and industries, only.

B) geographies, specific products, and industries.
C) industries and geographies, only.
D) geographies, only.

Question #6 of 39 Question ID: 440354

Which of the following statements is incorrect regarding the repurchase agreement market?

A) In the repo market, one counterparty borrows cash from another counterparty.
B) The majority of repos are for a long period of time.
C) A major market in which dealer banks operate is the repurchase agreements market.

D) Repos are short-term cash loans collateralized by securities.

Question #7 of 39 Question ID: 440303

Which of the following statements regarding comparison of economic capital models and VAR models are NOT correct?
I. Economic capital models have shorter time horizons.
II. Economic capital models have lower confidence levels.
III. Economic capital models have greater lack of data.
IV. Economic capital models are quite different than VAR models.

A) II, III and IV.

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

Question #8 of 39 Question ID: 440291

Given the following information, calculate the RAROC.

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 Gross revenue: $8 million.
Interest expense: $4 million.
Economic capital: 10 million.
Return on invested economic capital: 500,000.
Operating costs associated with making the loan: $1.5 million.
Expected loss on the loan: 300,000.

A) 40%.
B) 27%.
C) 42%.
D) 5%.

Question #9 of 39 Question ID: 440299

What is the adjusted RAROC for a business if its RAROC is 22%, the company's beta is 1.1, and the risk-free rate is 5%?

A) 17%.
B) 15.45%.
C) 24.2%.
D) 4.84%.

Question #10 of 39 Question ID: 440301

Bank for International Settlements (BIS) has a list of ten recommendations that supervisors should consider to make effective
use of risk measures not designed for regulatory purposes. Which of the following statements pertain to the BIS
recommendations for supervisors?
I. The board should have a basic understanding of the difference between gross (stand alone) and net (diversified)
enterprise-wide risk in assessing the bank's net risk tolerance. (Use of economic capital models in assessing capital
adequacy)
II. A bank must understand the strengths and weaknesses of the chosen risk measures. (Risk measures)
III. There are trade-offs to be considered in deciding between the available methods of measuring counter party credit risk.
(Counterparty credit risk)
IV. Financial instruments with embedded options need to be examined closely in order to control risk levels. (Interest rate risk in
banking book)

A) II, III and IV.

B) I, II and III.

C) I, II, III and IV.

D) I, II and IV.

Question #11 of 39 Question ID: 440295

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Given the following information what is the daily RAROC charge for market risk?
The appropriate adjustment factor for the day-to-day event risk that is not captured by the VAR model is 2.25.
The multiplier used to determine the unused portion of the VAR limit is 0.30.
The mulitiplier used to determine the charge for exceeding the VAR limit is 3.20.
The VAR limit over a 10-day period is $2,530,000.
The daily VAR is $950,000.

A) $2,617,500.
B) $1,100,000.
C) $3,040,000.
D) $2,587,500.

Question #12 of 39 Question ID: 440352

When contrasting the 2011 and 2012 Comprehensive Capital Analysis and Review (CCAR), which of the following statement
is(are) correct?

I. The 2011 CCAR disclosed virtually the same amount and detail of bank level stress data as the 2009 Supervisory Capital
Assessment Program (SCAP).

II. The 2012 CCAR required only that macro-scenario results be published.

A) Both I and II.

B) I only.
C) II only.

D) Neither I nor II.

Question #13 of 39 Question ID: 440349

In 2009, the Supervisory Capital Assessment Program (SCAP) was created. Prior to 2009, stress testing was relatively simple.
Which of the following statements correctly reflects stress testing after the development of SCAP? Post-SCAP, stress testing:

A) focuses on the whole firm, a more comprehensive look at the effect of the stress scenarios on the
institution.

B) focuses on specific bank products or business units.

C) is now static in nature.
D) focuses on earnings shocks, but not on capital adequacy.

Question #14 of 39 Question ID: 444843

Proposed federal policy measures and tactics that have not been implemented to alleviate firm-specific and systemic risks
related to large dealer banks most likely include:

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 A) tri-party repo utilities, creation of bridge banks and "emergency banks."
B) below market financing offers for purchasing certain assets, only.
C) subsidies for buying "toxic assets," creation of bridge banks and "emergency banks."
D) subsidies for buying "toxic assets," only.

Question #15 of 39 Question ID: 440284

An analyst simulates the distribution of operational losses for her employer. She finds that the loss that corresponds to the 99th
percentile of potential losses is $1,500,000 and the mean of the distribution is $250,000. The estimate of operational risk
economic capital is closest to:

A) $1,250,000.
B) $1,750,000.
C) $250,000.
D) $1,500,000.

Question #16 of 39 Question ID: 440289

Consider the following information pertaining to a loan:

Revenue: $4 million.
Expected loss: $200,000.
Interest expense: $2.5 million.
Economic capital: $6.25 million with a return of $200,000.

What is the risk-adjusted return on capital (RAROC)?

A) 20%.
B) 24%.
C) 14%.

D) 18%.

Question #17 of 39 Question ID: 440305

Which of the following is NOT a reason that the expected shortfall (ES) is a more appropriate risk measure than value at risk
(VAR)?

A) ES has less restrictive assumptions regarding risk/return decision rules than VAR.
B) ES gives an estimate of the magnitude of a loss.
C) For normal distributions, only ES satisfies all the properties of coherent risk measures.
D) For non-elliptical distributions, the portfolio risk surface formed by holding period and confidence
level is more convex for ES.

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Question #18 of 39 Question ID: 440242

Which of the following statements does NOT adequately describe economic capital?
I. It is always less than regulatory capital.
II. It differs depending on the type of borrower, independent of borrower risk.
III. It must be considered along with regulatory capital when making allocation decisions.
IV. It is the amount of capital that management determines to be necessary to cushion losses from an asset or business line.

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

Question #19 of 39 Question ID: 444824

Success in applying a VaR model to operational risk has been limited because of issues relating to:

A) not enough data.

B) appropriate loss threshold selection.
C) loss measurement classification.

D) appropriate time horizon selection.

Question #20 of 39 Question ID: 440290

A bank loan has expected gross revenue of $300,000, interest expense of $200,000, expected return on the $200,000 of
economic capital of $20,000, expected loss on the loan of $10,000 and operating costs associated with the loan of $70,000.
What is the risk adjusted return on capital (RAROC) for this loan?

A) 55%.
B) 30%.

C) 20%.
D) 10%.

Question #21 of 39 Question ID: 440286

Economic capital protects the company against insolvency due to unexpected operational losses. In identifying the appropriate
level of economic capital, a bank should focus on the part of the loss probability distribution represented by losses:

A) below the loss at a given level of confidence.

B) in excess of the loss at a given level of confidence.
C) greater than the expected loss.

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 D) between the loss at a given level of confidence and the expected loss.

Question #22 of 39 Question ID: 440357

Which of the following is the most common historical example of a systemic risk?

A) War.
B) A run on a bank.
C) Failure of a counterparty.
D) Terrorism.

Question #23 of 39 Question ID: 440302

Modeling the credit risk dependency structure between borrowers is challenging. Both linear and nonlinear dependency
relationships between obligors need to be considered. Which of the following statements about the modeling of dependency
structure between borrowers are CORRECT? Dependencies in credit risk between borrowers can be modeled using:
I. credit risk portfolio models.
II. models using copulas.
III. models based on asymptotic single-risk factors (ASRF).
IV. models based on arbitrage price theory (APT).

A) I, III and IV.

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

Question #24 of 39 Question ID: 440294

Calculate the RAROC capital charge for market risk assuming:

The appropriate adjustment factor for the day-to day event risk that is not captured in VAR is 3.
The multiplier used to determine the charge for the unused portion of the VAR limit is −0.20.
The multiplier used to determine the charge for exceeding the VAR limit is 5.
The VAR limit is $10 million.
VAR is $9 million.

A) $26,800,000.
B) $28,200,000.
C) $30,200,000.
D) $435,200,000.

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Question #25 of 39 Question ID: 440356

Which of the following statements is incorrect regarding liquidity concerns for dealer banks? A liquidity crisis for a dealer bank is
accelerated if:

A) There is a flight of repo creditors and prime brokerage clients.

B) OTC derivatives counterparties begin to increase their exposures to the dealer banks.
C) Counterparties try to reduce their exposure by restructuring existing OTC derivatives with the dealer.
D) There is a the loss of cash settlement privileges.

Question #26 of 39 Question ID: 440292

A credit institution is allowed to reduce its total operating risk charge by up to 20% through the use of insurance if it adopts the:

A) advanced measurement approach (AMA).

B) basic indicator approach (BIA).
C) standardized approach (SA).
D) advanced standardized approach (ASA).

Question #27 of 39 Question ID: 444901

Which statement most likely applies to the Capital Plan Rule and the annual Comprehensive Capital Analysis and Review (CCAR)
for bank holding companies (BHCs)?

A) The Capital Plan rule covers U.S. and foreign domiciled BHC's with consolidated assets of more than
$100 billion and is maintained by the Secretary of the Treasury.
B) The Capital Plan Rule covers U.S. domiciled BHCs with total consolidated assets of more than $500
billion and is maintained by the Secretary of the Treasury.

C) The Capital Plan Rule covers U.S. domiciled BHCs with total consolidated assets of more than $50
billion and is maintained by the Federal Reserve.

D) The Capital Plan rule covers U.S. and foreign domiciled BHC's with consolidated assets of more than
$10 billion and is maintained by the Federal Reserve.

Question #28 of 39 Question ID: 440353

Examples of types of over-the-counter (OTC) derivatives are:

I. interest rate swaps

II. collateralized debt obligations (CDOs)

III. collateralized mortgage obligations (CMOs)

IV. credit default swaps (CDSs)

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

Question #29 of 39 Question ID: 440565

Practices which can result in a strong and effective capital adequacy process for a bank holding company (BHC) include: risk
identification, internal controls (including model review and valuation), corporate governance, and capital policy (including setting
of goals and targets and contingency planning). Which of the following statements relates directly to corporate governance?

A) BHCs should establish a mechanism for a comprehensive, independent, and regular review and
validation of all the models used for capital adequacy planning purposes.

B) BHCs should develop a process to effectively identify all of their risk exposures on a firm-wide basis.
C) BHCs should develop a capital policy that clearly defines the principles and guidelines for capital
goals, issuance, usage, and distributions.

D) BHCs should have boards actively involved in evaluating and approving their internal capital
adequacy plans.

Question #30 of 39 Question ID: 440351

Which of the following statements is incorrect regarding the 2011 European Banking Authority (EBA) Irish and 2011 EBA
European-wide stress tests?

A) EBA Europe specified eight macro-factors for each of 21 countries.

B) Both were disclosed after the CCAR, and contained considerable detail.
C) In the EBA Irish case, the report contained a comparison of bank and third party estimates of losses.
D) EBA Irish tested simple scenarios with three dimensions, GDP growth, unemployment, and the house
price index.

Question #31 of 39 Question ID: 440564

Anne Tessa, FRM, an analyst, is discussing net interest income projections with a colleague. Which of the following should not be
incorporated into net interest income projections?

A) Including embedded options.

B) Forward earnings guidance.

C) Prepayment rates.
D) Balance sheet positions.

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Question #32 of 39 Question ID: 440293

What is the major source of market risk for a bank?

A) Credit risk.
B) Exchange rate risk.
C) Gap risk.
D) Operational risk.

Question #33 of 39 Question ID: 440355

In 2007, most dealer banks were leveraged to what level?

A) 25:1.
B) 15:1.
C) 20:1.
D) 30:1.

Question #34 of 39 Question ID: 440285

Which of the following is TRUE about economic capital?

I. For most financial institutions, economic capital held exceeds regulatory capital.
II. It protects financial institutions from expected and unexpected losses.
III. It is the capital required to keep the banking system safe.
IV. It is a function of the risk of the financial institutions and inversely related to performance.

A) II and III.

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

Question #35 of 39 Question ID: 440300

Assume that the risk-adjusted return on capital (RAROC) is equal to 15%. If the risk-free rate is equal to 3% and the company's
equity beta is 1.5, what is the adjusted RAROC?

A) 12%.

B) 8%.
C) 18%.
D) 4.5%.

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Question #36 of 39 Question ID: 440297

The flaw in the first-generation risk-adjusted return on capital (RAROC) approach is that it:

A) is poorly understood by investors and directors.

B) only estimates the RAROC hurdle rate.
C) assumes that the default probability remains constant.
D) attempts to align the risk of the business with the firm's equity.

Question #37 of 39 Question ID: 440304

How many of the following statements regarding the risk measures (standard deviations, value at risk (VAR), expected shortfall
(ES), and spectral and distorted risk measures) are NOT correct?
Standard deviation is stable because it depends upon assumptions concerning the loss distribution.
VAR is coherent because it violates the monotonicity condition.
Expected shortfall is easy to interpret.
Spectral and distorted risk measures are intuitive and easily understood.

A) 4.
B) 2.
C) 1.

D) 3.

Question #38 of 39 Question ID: 440298

Assume RAROC is 10%, the risk free rate is 4%, the market return is 10%, the firm's required return on equity is 12%, and the
firm's beta is 1.1. What is the ARAROC and should the project be accepted?

A) 10%; accept.
B) 5.5%; accept.
C) 7.3%; accept.
D) 5.5%; reject.

Question #39 of 39 Question ID: 444842

Which of the following statements is least accurate regarding modeling a bank's balance sheet over a stress test horizon period
under the Supervisory Capital Assessment Program (SCAP)?

A) A two-year horizon stress test must account for losses through year 3 of the test.
B) A bank's stress test model does not need to account for assets sold or originated from a future
merger partner.

C) Capital is defined as common equity in the stress test.

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D) Both the income statement and balance sheet are modeled in the stress test.

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