Multiples Flashcards
A Credit Rating Agency (CRA) observes a signal about the credit quality of a bond. The signal follows a normal distribution centred around the true value. If the actual, standardized value observed is > 1.96, the
CRA assigns an inflated rating. The issuer asks three CRAs, and only makes public favourable ratings.
What is the (rounded) probability of receiving an inflated rating? [hint: 1.96 is the threshold for statistical significance at the 95% confidence level…]
(A) 5%
(B) 7%
(C) 14%
(D) 40%
Computation
Prob of 1 CRA not giving an inflated rating = N(1.96) = 97.5%
Prob of at least 1 CRA out of 3 giving an inflated rating = 100% - [97.5%^3] = 7%
hence B, 7%
Which of the following is more likely to be a rationale for introducing a deposit rate ceiling?
(A) It limits banks’ competition
(B) It favours alternative forms of liquid investments
(C) It favours banks’ investments in risk management
(D) It limits banks’ proprietary trading
It limits banks’ competition
The LIBOR is traditionally computed as the average rate:
(A) Banks believe they can pay borrowing from other banks
(B) Banks believe they can get lending to other banks
(C) Banks actually pay borrowing in the money market
(D) Banks actually get investing in the money market
Banks believe they can pay borrowing from other banks
Which of the following is least likely to be true for a bank? With Basel II, when markets’ volatility increases
significantly
(A) Risk-weighted Assets increase
(B) Total Assets decrease
(C) Leverage increases
(D) Tier 1 capital remains stable
[Both B and C are acceptable answers with info provided]
L-retention regulatory requirements for structured finance products mandate that the issuer keeps
(A) At least 5% nominal exposure
(B) At least 5% of each tranche
(C) The first-loss tranche
(D) At least 10% of each branch
Both B and C
Which of the following is most likely to be a caveat of imposing a maximum leverage ratio for banks?
(A) It might increase the impact of model errors
(B) It might increase the impact of measurement errors
(C) It might increase the potential for regulatory arbitrage
(D) It might increase the incentives toward extra risk taking
It might increase the incentives toward extra risk taking
Current rules on deposit insurance schemes in Europe mandates that in every EU country:
(A) Each deposit is insured for at least 100,000 euros
(B) Each deposit is insured for no more than 100,000 euros
(C) Each deposit is insured for exactly 100,000 euros
(D) Each deposit is insured on average for 100,000 euros
Each deposit is insured for at least 100,000 euros
A bank has lent out $200 million with a yearly interest rate of 5%. The loans have a 1% probability of defaulting entirely. The bank has $150 million of deposits paying no interests. The paid-in equity capital of the bank is $50.5 million. What is the net subsidy for the bank from deposit insurance?
(A) $0 million
(B) $1 million
(C) $2 million
(D) $3 million
Computation
Actual premium: (150+50.5) – 200 = $0.5 million
Fair premium: 1% x 150 =$1.5 million
Net subsidy = 1.5 – 0.5 = $1 million
On one day, an American bank enters a 6-month forward contract to buy Japanese Yen (JPY). The day
after, the JPY experience a severe depreciation. Under the current exposure method for derivatives of Basel I, what happens to the capital requirements for this bank as a result of this market movement?
(A) Capital requirements increase
(B) Capital requirements stay the same
(C) Capital requirements decrease
(D) Capital requirements do not depend on market prices
(B) Capital requirements stay the same
Explanation:
The long position of the American bank on JPY has a null market value when created.
A depreciation of the JPY means the value of the position becomes negative. Under the current exposure method, (a change in) market value affects capital requirements only if the market value is positive.
An indirect centralized regulatory approach to avoid direct contagion in banking mainly entails that
(A) The Government guarantees inter-banks transactions
(B) The Central Bank guarantees inter-banks transactions
(C) Central clearing of all inter-bank transactions is mandatory
(D) Avoiding central clearing of inter-bank transactions is penalized
Avoiding central clearing of inter-bank transactions is penalized
Comprehensive Risk Measure adjustments introduced with Basel “II.5”
(A) Try to compensate for the underestimation of the effects of assets correlation
(B) Try to compensate for differences in how VaR is computed for market versus credit risk
(C) Try to compensate for the use of recent historical data in computing risk
(D) Try to compensate for wrong-way risk for derivatives
Try to compensate for the underestimation of the effects of assets correlation
What does the Expected Shortfall (ES) measure?
(A) The expected market return, conditional on having a crisis
(B) The difference between the capital needed and required, conditional on having a crisis
(C) The correlation between market’s and stock’s value at risk, conditional on having a crisis
(D) The market volatility, conditional on having a crisis
The expected market return, conditional on having a crisis
Under current rules for US money market funds, redemption gates are:
(A) Mandatory if the redemption rate gets above a certain threshold
(B) Mandatory if weekly liquidity drops below a certain threshold
(C) Mandatory if the shadow NAV drops below a certain threshold
(D) Never mandatory
Never mandatory
Which of the following is not an element supporting the separation of commercial and investment banks?
(A) Banks can sell their own securities to their customers
(B) The price of traded securities is volatile
(C) Banks should have a well-diversified portfolio of assets
(D) Banks use their own capital for trading
Banks should have a well-diversified portfolio of assets
Which of the following is least likely to be a good explanation for why European banks cut dollar-
denominated lending more than euro-denominated lending when their credit quality decreases?
(A) Their borrowing in dollars becomes relatively more expensive
(B) They mostly lend to European firms, who want to reduce their borrowing in foreign currency
(C) Covered interest rate parity does not hold when there is an excess of hedging demand
(D) Most of their insured deposits are denominated in euro
They mostly lend to European firms, who want to reduce their borrowing in foreign currency
