Chapter 21

Question 1

When talking about capital for a bank, what is it?

Answer 1

Retained earnings / shareholders equity

Question 2

Provide 5 reasons why having capital is important to the function of the FI

Answer 2

1) Absorbs unanticipated losses
2) Protects depositors that are not insured
3) Protect tax payers and insurance funds
4) Protect FI’s against increase in insurance premiums
5) Fund investments or growth (acquisitions, etc)

Question 3

When a bank needs to write off any loans, where does that money get taken from?

Answer 3

The capital/equity

Question 4

If a FI needs to adjust the balance sheet, what needs to be taken into consideration?

Answer 4

Market values of certain assets (NOT book value)

Question 5

What is the biggest risk to equity?

Answer 5

Credit risk (when loans need to be written off or defaulted)

Question 6

What are 3 other terms for “capital” for a FI

Answer 6

1) Net worth
2) Book value
3) Equity

Question 7

What is Basel accords?

Answer 7

A movement that has a goal of preventing bank failures

Question 8

What is the difference between Basel 1, Basel 2 and Basel 3

Answer 8

Each version gets more and more restrictive in terms of capital adequacy