Capital Quiz #2

Front 1

Bank capital is available to absorb losses, promote public confidence, restrict excessive asset growth, and ___________.

Back 1

Provide protection to depositors and the FDIC insurance fund

Front 2

Capital guidelines are covered in Part ___ of the Corporations Rules and Regulations.

Back 2

325

Front 3

Tier 1 Capital, aka Core Capital, includes what?

Back 3

• Stockholder’s equity - common stock and related surplus, undivided profits (aka retained earnings), less net unrealized losses on AFS securities with readily determinable fair values

• Noncumulative perpetual preferred stock (issuer has the option to waive payment of dividends; dividends so waived do not accumulate to future periods)

• Minority interest in consolidated subsidiaries

Front 4

List three items that are deducted from Tier 1 Capital (Core Capital).

Back 4

• All intangible assets other than eligible mortgage servicing assets, nonmortgage servicing assets, and purchased credit card relationships. Servicing assets and purchased credit card relationships (PCCRs) are eligible for inclusion in core capital with certain limitations. Generally, servicing assets and PCCRs are limited to 100% of Tier 1 capital. In addition, nonmortgage servicing assets and PCCRs are subject to a separate sublimit of 25% of Tier 1 capital.

• Identified losses

• Noneligible credit-enhancing interest-only strips

• Deferred tax assets in excess of the limit set forth in Section 325.5(g) - the lesser of: (i) the amount expected to be realized within one year, or (ii) 10% of Tier 1 capital; prior to deductions.

Front 5

The allowance for loan and lease losses is include in Tier 2 up to a maximum of _____ percent of risk-weighted assets.

Back 5

1.25%

Front 6

List three other items that are included in Tier 2 Capital.

Back 6

• Cumulative perpetual preferred stock, long-term preferred stock (at least 20 years), and any related surplus

• Perpetual preferred stock (where the dividend is reset periodically)

• Hybrid capital instruments, including mandatory convertible debt

• Term subordinated debt and intermediate term preferred stock

• Up to 45% of the pre-tax net unrealized gains on AFS equity securities

Front 7

The aggregate amount of term subordinated debt and intermediate-term preferred stock is limited to ___ % of Tier 1 Capital.

Back 7

50%

Front 8

Total Risk-Based Capital is the sum of two capital components less investments in unconsolidated banking and finance subsidiaries and reciprocal holdings of capital instruments of other banks. What are the two capital components?

Back 8

Tier 1 and Tier 2 Capital

Front 9

Name two capital account adjustments.

Back 9

• Identified losses

• Inadequate ALLL

• Liabilities not shown on books

Front 10

What is the minimum Tier 1 Leverage Capital requirement for a 1-rated institution? All other institutions should maintain a minimum Tier 1 Leverage ratio of what?

Back 10

3% for “1” rated; 4% or higher for all others

Front 11

The minimum Risked-Based Total Capital should be what?

Back 11

8%

Front 12

Under prompt corrective action regulations, a bank must file a written capital restoration plan within ___ days of the date that the bank receives notice or is deemed to have notice that the bank is undercapitalized, significantly undercapitalized, or critically undercapitalized.

a. 30 days
b. 35 days
c. 40 days
d. 45 days

Back 12

d. 45 days

Front 13

If an institution’s Tier 1 Leverage Capital falls below 2%, the FDIC can pursue termination of deposit insurance under what section of the FDI Act?

Back 13

Section 8(a)

Front 14

The process of determining the adequacy of a bank’s capital begins with a qualitative evaluation of critical variables, what are four of the variables?

Back 14

1. Assets
2. Earnings
3. Liquidity and funds management
4. Deposit structure
5. Contingent liabilities
6. Local characteristics
7. Parent company relationship
8. Quality of management

Front 15

In addition to qualitative factors, there are numerous quantitative measurements that may be made. List two of them.

Back 15

1. Equity capital to total assets
2. Equity growth to asset growth
3. Dividends as a percent of income
4. Indices of capital adequacy in the bank holding company environment
5. Future performance

Front 16

What are the three alternatives available for an operating bank to increase its level of capital protection?

Back 16

1. Increase earnings retention through higher earnings and/or lower cash dividend rates.
2. Sale of additional stock
3. Direct contribution by owners to capital accounts.

Front 17

When a capital enhancement program proves to be unsuccessful and the sale of new equity may be needed to recapitalize the institution, what information should be included in the Supervisory Section of the Report of Examination?

Back 17

1. A complete list of present shareholders
2. Information concerning individual directors relative to their capacity and willingness to purchase stock.
3. A list of prominent customers and depositors of the bank who are not shareholders but who might possibly be interested in acquiring stock.
4. A list of other individuals or possible sources of support in the community who because of known wealth or for other reasons might desire to subscribe to new stock.

Front 18

A person can evade a written capital commitment through taking Chapter 11 Bankruptcy protection. True or False?

Back 18

False

Front 19

The State Banking Code states a state bank must maintain Tier 1 Leverage Capital at 9%, and the bank has entered into written agreement with the Federal Reserve Board to maintain its Tier 1 Leverage Capital at 9.5%. Part 325 of the Corporation’s Rules and Regulations states the minimum Tier 1 Leverage ratio for institutions not rated a 1 is 4%. What is the minimum Tier 1 Leverage Capital Ratio that the bank must maintain?

Back 19

9.5%

Front 20

A bank has a Total Risked-based Capital ratio of 8% with 3% of the total capital consisting of Tier 1 Capital. Is the institution in compliance with risked-based capital regulations and why?

Back 20

No. One-half of the minimum must be Tier 1 (4%).

Front 21

An institution has a Tier 1 Leverage ratio of 7%; however, after adjusting for an inadequate ALLL, the Tier 1 Leverage ratio declines to 6%. Is the institution in compliance with the minimum capital requirements?

Back 21

Yes, the minimum Tier 1 Leverage Capital for an adequately capitalized institution is 4%; 3% in a 1-rated bank.

Front 22

The bank has established specific reserves for its ORE parcels, are these reserves included as part of the bank’s capital base for calculating Tier 1 Capital?

Back 22

No. ORE reserves, whether considered general reserves or specific reserves, are not recognized as a component of capital for either risk-based capital or leverage capital standards.

Front 23

Differences in accounts are subtracted from what capital category?

Back 23

Tier 1

Front 24

Section __ of the FDI Act establishes the requirements of prompt corrective action. The regulation that implements prompt corrective action is Part ___ of the FDIC Rules and Regulations.

Back 24

The answer is “Section 38” of the FDI Act, and “Part 325, Subpart B” of FDIC Rules and Regulations.