nayizhenfeng

 

AIM 3: Discuss the benefits and weaknesses of the original 1988 Basel Accord.

 

1、The minimum capital requirement under pillar I of the new Basel Capital Accord is:

A) 6% of risk-weighted assets. 

B) 8% of risk-weighted assets. 

C) 4% of risk-weighted assets.

D) 2% of risk-weighted assets.

nayizhenfeng

 

The correct answer is B

 

BIS uses the Cooke ratio to require capital equivalent to 8 percent of risk-weighted assets.

nayizhenfeng

 

2、The Basel II Accord generates overall capital requirements that should be:

A) higher than the level indicated by the first Accord. 

B) lower than the level indicated by the first Accord. 

C) less sensitive to a bank’s risky activities. 

D) similar to the level indicated by the first Accord.

nayizhenfeng

 

The correct answer is D

 

Basel II attempted to generate overall capital requirements that were similar to the level indicated by the first Accord, but more sensitive to the bank’s risky activities.

nayizhenfeng

 

The correct answer is D

 

Deposit insurance increases the bank’s risk taking behavior by shifting potential losses to FDIC. Hence, the bank is likely to take riskier loans than if it had to bear the full cost of defaults.

nayizhenfeng

 

2、 A moral hazard problem associated with Federal Deposit Insurance Corporation (FDIC) deposit guarantees is that such insurance is likely to:

A) decrease incentives of depositors to monitor the financial strength of banks. 

B) increase risk-taking behavior on the part of banks. 

C) increase the risk of depositors. 

D) be unavailable for low income depositors.