Sample Questions and Answers
Which of the following is the primary purpose of capital adequacy ratios in banking?
A) To determine the profitability of a bank
B) To assess the ability to absorb losses
C) To evaluate customer satisfaction
D) To estimate future growth potential
Answer: B
Basel III regulations primarily aim to improve:
A) Bank liquidity and solvency
B) Stock market trading
C) Central bank independence
D) Fiscal policy transparency
Answer: A
The minimum capital adequacy ratio set by Basel III for large banks is:
A) 8%
B) 10%
C) 12%
D) 14%
Answer: A
A bank’s Tier 1 capital mainly includes:
A) Bonds and debentures
B) Common equity and retained earnings
C) Short-term loans
D) Deposits from customers
Answer: B
Which of the following is NOT considered a component of Tier 2 capital?
A) Subordinated debt
B) Retained earnings
C) Hybrid instruments
D) Provisions for loan losses
Answer: B
The leverage ratio under Basel III is designed to:
A) Control the amount of debt in the financial system
B) Ensure that banks have enough capital to absorb losses
C) Measure the profitability of a bank
D) Limit excessive lending to high-risk borrowers
Answer: B
Solvency in a financial institution primarily refers to:
A) The ability to generate profits
B) The capacity to meet long-term liabilities
C) The quality of the bank’s assets
D) The bank’s operational efficiency
Answer: B
What does the “capital conservation buffer” in Basel III represent?
A) A reserve of capital to absorb potential losses during periods of economic stress
B) A financial incentive for banks to increase lending
C) A method to diversify a bank’s portfolio
D) A liquidity cushion for managing daily operations
Answer: A
A higher capital adequacy ratio (CAR) indicates:
A) Greater risk of insolvency
B) A more financially robust bank
C) Lower profitability
D) An over-leveraged bank
Answer: B
The “leverage ratio” under Basel III is designed to limit:
A) The total value of loans issued by banks
B) The ratio of debt to equity in financial institutions
C) The ratio of total assets to Tier 1 capital
D) The volume of customer deposits
Answer: C
The Net Stable Funding Ratio (NSFR) measures a bank’s:
A) Ability to cover long-term liquidity needs with stable sources of funding
B) Profitability over the next 12 months
C) Efficiency in loan underwriting
D) Capacity to meet short-term liquidity needs
Answer: A
The Tier 1 capital ratio under Basel III is set to:
A) 4%
B) 6%
C) 8%
D) 10%
Answer: A
A bank with low solvency risk is more likely to:
A) Generate higher returns for its investors
B) Experience difficulty meeting its long-term obligations
C) Be downgraded by credit rating agencies
D) Have a higher level of debt
Answer: A
A financial institution is considered “insolvent” when:
A) It has negative net worth
B) It experiences higher-than-expected losses
C) Its assets are illiquid
D) Its market capitalization decreases significantly
Answer: A
A bank’s liquidity risk is most directly impacted by:
A) Capital adequacy ratio
B) Its ability to sell assets quickly without significant loss in value
C) The interest rate charged on loans
D) The size of the loan portfolio
Answer: B
The risk-weighted assets (RWA) measure:
A) The total assets held by a financial institution
B) The potential risk posed by the bank’s lending activities
C) The value of the bank’s equity
D) The total liabilities of the bank
Answer: B
The minimum total capital ratio under Basel III for large banks is:
A) 4%
B) 6%
C) 8%
D) 10%
Answer: C
Which of the following is a key indicator of a bank’s solvency?
A) Capital Adequacy Ratio (CAR)
B) Return on Equity (ROE)
C) Liquidity Coverage Ratio (LCR)
D) Loan-to-Deposit Ratio (LDR)
Answer: A
A higher risk-weighted asset ratio (RWA) would typically lead to:
A) A decrease in capital requirements
B) An increase in capital requirements
C) Higher profitability
D) More liquidity for the bank
Answer: B
Under Basel III, the Liquidity Coverage Ratio (LCR) is intended to ensure:
A) Banks have sufficient liquid assets to survive a 30-day liquidity stress scenario
B) Banks can meet capital requirements under normal conditions
C) Banks can diversify their funding sources
D) Banks minimize their operational costs
Answer: A
Which of the following can improve a bank’s capital adequacy ratio?
A) Increasing its loan portfolio
B) Selling off non-core assets
C) Reducing the interest rate on loans
D) Increasing the dividend payout to shareholders
Answer: B
A “solvency test” measures a company’s ability to:
A) Pay short-term liabilities with its liquid assets
B) Generate revenue from its operations
C) Meet its long-term financial obligations
D) Manage operational costs effectively
Answer: C
What is the effect of a bank having a lower capital adequacy ratio?
A) Higher regulatory pressure
B) Increased customer confidence
C) Increased lending capacity
D) Higher stock market valuation
Answer: A
The Core Equity Tier 1 (CET1) ratio under Basel III focuses on:
A) All capital including Tier 1 and Tier 2
B) The highest quality capital, such as common equity
C) The leverage ratio
D) Liquidity coverage
Answer: B
What is the main purpose of the “counter-cyclical buffer” under Basel III?
A) To prevent excessive risk-taking during periods of economic expansion
B) To increase the bank’s liquidity during a crisis
C) To enhance capital adequacy during a financial downturn
D) To decrease capital requirements during economic growth
Answer: A
Which of the following does NOT contribute to a bank’s solvency?
A) Long-term debt
B) Non-performing loans
C) Equity capital
D) Liquid reserves
Answer: B
A bank’s capital adequacy is essential for:
A) Ensuring the stability of the financial system
B) Maximizing shareholder returns
C) Expanding the bank’s operations
D) Ensuring compliance with tax regulations
Answer: A
The Leverage Ratio under Basel III helps to limit:
A) Excessive lending by banks
B) Over-reliance on short-term funding sources
C) Overexposure to risky assets
D) Capital flight from emerging markets
Answer: C
A bank’s solvency is primarily influenced by:
A) Its asset quality and equity capital
B) The bank’s interest rate policy
C) The volume of customer deposits
D) The geographical location of the bank
Answer: A
Which of the following would improve a bank’s solvency position?
A) Increasing high-risk investments
B) Selling off low-yield government bonds
C) Reducing debt levels
D) Raising short-term capital
Answer: C
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