TE: Capital Review Exam Questions and
Answers
What is the purpose of Capital? - Answers -1- Absorb losses
2- Promote Public Confidence
3- Restrict Excessive Asset Growth
4- Provide Protection to Depositors and the FDIC insurance Fund
Define core capital (Tier 1). - Answers -Sum of core capital elements
o Minus all intangible assets (other than MSAs, NMSAs and PCCRs eligible for
inclusion in core capital)
o Minus credit-enhancing interest-only strips that are not eligible for inclusion in core
capital
o Minus disallowed deferred tax assets
o Minus any amount of nonfinancial equity investments
What is Tier 2 Capital limited to? - Answers -Total of Tier 2 Capital - cannot exceed Tier
1 capital
How would preferred stock with an original maturity of 10 years fit into Tier 2 Capital? -
Answers -It along with all term subordinated debt would be limited to 50% of Tier 1
What if Term subordinated debt or intermediate-term preferred stock is less than 5
years - how much do you include in Tier 2? - Answers -1-2yrs 20%
2-3yrs 40%
3-4yrs 60%
4-5yrs 80%
>5yrs 100%
What is total risk based capital? - Answers -Tier 1 + Tier 2 Capital
What is included in Tier 3 Capital? - Answers -Unsecured subordinated debt with
original maturity of 2+ years, not redeemable prior to maturity w/o FDIC consent, has
lock in clause that prevents payment of P&I even at maturity if it would cause RBC ratio
to fall and remain below minimum.
What limit is placed on Tier 2 plus Tier 3 Capital? - Answers -100% of Tier 1 Capital
At what point do the market risk risk based capital rules apply with regard to trading
activity for Tier 3 Capital? - Answers -Trading activity on a worldwide basis equals 10
percent or more of total assets or $1 billion or more
, A bank subject to market risk rules for Tier 3 Capital must complete what items? -
Answers -1. Value-at-Risk Model - to estimate the maximum amount the bank's covered
positions could decline over a fixed period
2. Independent Risk Control Unit - Have a risk management system, which is
independent and defines a risk control unit that reports to senior management
3. Daily Internal Risk Measurement Model - Have an internal risk measurement model
integrated into the daily management process
What are the categories for Risk Weights for Balance Sheet Assets? - Answers -0%;
20%; 50%; 100%; and 200%
What is in Category 1 - 0%? - Answers -1. Cash
2. Gold bullion
3. FRB Balances
4. Central banks of OECD countries balances
5. Guaranteed by US Gov't Agencies (GNMA, VA, FHA, FMHA, ExIm Bank, OPIC,
CCC, SBA) or OECD Central Governments
6. Local currency claims on or unconditionally guaranteed by non-OECD central
governments
7. Federal Reserve Bank stock
What is in Category 2- 20%? - Answers -1. Correspondent bank balances and portions
gty'd by banks
2. Short-term claims on and portions gty'd by non-OECD banks
3. Portions of loans and other claims conditionally guaranteed by US Treasury, US
government agencies or OECD central banks
4. Portions of conditionally guaranteed claims by non-OECD central governments
5. Securities and claims gty's on Gov't sponsored agencies (FHLMC, FNMA, SLMA &
FHLB)
6. General obligation securities of state or political subdivisions
7. Loans collateralized by securities issued/guaranteed by gov't (agency, sponsored
agency, OECD) securities
8. Secured by cash in a segregated account at a bank
9. Cash items in process of collection
10. Investment in mutual funds which only permit holding of 0% and 20% risk weighted
assets
11. Recourse obligations, direct credit substitutes, residual interests, and
asset/mortgage backed securities
(Rated in the top two categories (AAA or AA) or the highest rating category for short
term ratings (A-1 or P-1))
What is in Category 3 - 50%? - Answers -1. Loans fully secured by first liens on a
residential property made on prudent basis and not PD 90 days or more or nonaccrual
2. Loans to builders with substantial project equity for construction of residences that
have been pre-sold under firm contracts
Answers
What is the purpose of Capital? - Answers -1- Absorb losses
2- Promote Public Confidence
3- Restrict Excessive Asset Growth
4- Provide Protection to Depositors and the FDIC insurance Fund
Define core capital (Tier 1). - Answers -Sum of core capital elements
o Minus all intangible assets (other than MSAs, NMSAs and PCCRs eligible for
inclusion in core capital)
o Minus credit-enhancing interest-only strips that are not eligible for inclusion in core
capital
o Minus disallowed deferred tax assets
o Minus any amount of nonfinancial equity investments
What is Tier 2 Capital limited to? - Answers -Total of Tier 2 Capital - cannot exceed Tier
1 capital
How would preferred stock with an original maturity of 10 years fit into Tier 2 Capital? -
Answers -It along with all term subordinated debt would be limited to 50% of Tier 1
What if Term subordinated debt or intermediate-term preferred stock is less than 5
years - how much do you include in Tier 2? - Answers -1-2yrs 20%
2-3yrs 40%
3-4yrs 60%
4-5yrs 80%
>5yrs 100%
What is total risk based capital? - Answers -Tier 1 + Tier 2 Capital
What is included in Tier 3 Capital? - Answers -Unsecured subordinated debt with
original maturity of 2+ years, not redeemable prior to maturity w/o FDIC consent, has
lock in clause that prevents payment of P&I even at maturity if it would cause RBC ratio
to fall and remain below minimum.
What limit is placed on Tier 2 plus Tier 3 Capital? - Answers -100% of Tier 1 Capital
At what point do the market risk risk based capital rules apply with regard to trading
activity for Tier 3 Capital? - Answers -Trading activity on a worldwide basis equals 10
percent or more of total assets or $1 billion or more
, A bank subject to market risk rules for Tier 3 Capital must complete what items? -
Answers -1. Value-at-Risk Model - to estimate the maximum amount the bank's covered
positions could decline over a fixed period
2. Independent Risk Control Unit - Have a risk management system, which is
independent and defines a risk control unit that reports to senior management
3. Daily Internal Risk Measurement Model - Have an internal risk measurement model
integrated into the daily management process
What are the categories for Risk Weights for Balance Sheet Assets? - Answers -0%;
20%; 50%; 100%; and 200%
What is in Category 1 - 0%? - Answers -1. Cash
2. Gold bullion
3. FRB Balances
4. Central banks of OECD countries balances
5. Guaranteed by US Gov't Agencies (GNMA, VA, FHA, FMHA, ExIm Bank, OPIC,
CCC, SBA) or OECD Central Governments
6. Local currency claims on or unconditionally guaranteed by non-OECD central
governments
7. Federal Reserve Bank stock
What is in Category 2- 20%? - Answers -1. Correspondent bank balances and portions
gty'd by banks
2. Short-term claims on and portions gty'd by non-OECD banks
3. Portions of loans and other claims conditionally guaranteed by US Treasury, US
government agencies or OECD central banks
4. Portions of conditionally guaranteed claims by non-OECD central governments
5. Securities and claims gty's on Gov't sponsored agencies (FHLMC, FNMA, SLMA &
FHLB)
6. General obligation securities of state or political subdivisions
7. Loans collateralized by securities issued/guaranteed by gov't (agency, sponsored
agency, OECD) securities
8. Secured by cash in a segregated account at a bank
9. Cash items in process of collection
10. Investment in mutual funds which only permit holding of 0% and 20% risk weighted
assets
11. Recourse obligations, direct credit substitutes, residual interests, and
asset/mortgage backed securities
(Rated in the top two categories (AAA or AA) or the highest rating category for short
term ratings (A-1 or P-1))
What is in Category 3 - 50%? - Answers -1. Loans fully secured by first liens on a
residential property made on prudent basis and not PD 90 days or more or nonaccrual
2. Loans to builders with substantial project equity for construction of residences that
have been pre-sold under firm contracts
