FINAN 4300 Problem Set 9

How many iterations of the Basel Accord have occurred over the years? Name them and the major focus

Basel I (1988) introduced minimum capital requirements for banks, focusing primarily on credit risk;

Basel II (2004) expanded the framework to include operational and market risk, refined risk -weighted asset calculations, and emphasized supervisory review and market discipline

Basel III (2010, strengthened after the global financial crisis) introduced leverage ratios, and created liquidity standards such as the Liquidity Coverage Ratio and the Net Stable Funding Ratio

What do the components in the acronym CAMELS stand for?

CAMELS is a supervisory framework used by regulators to evaluate banks. Examiners assign ratings in each category and an overall composite score. Poor CAMELS ratings can restrict a bank’s operations and invite closer oversight.

Capital adequacy: whether the bank has enough equity to absorb losses.

Asset quality: the riskiness of loans and investments.

Management: the quality, competence, and integrity of leadership.

Earnings: profitability and sustainability of income.

Liquidity: the ability to meet short -term obligations.

Sensitivity to market risk: exposure to interest rate and market changes

What is the rating scale used by the examiners in a Safety and Soundness exam?

The CAMELS rating system assigns scores from 1 to 5, where 1 = strong performance and minimal supervisory concern and 5 = critical weaknesses and imminent risk of failure; these scores are confidential but heavily influence supervisory actions and enforcement measures against troubled institutions.

What is another name for the Dodd -Frank Wall Street Reform Act?

The Dodd Frank Act, is also referred to in practice as the Wall Street Reform Act; it represented the most sweeping financial regulatory reform since the Great Depression, aiming to increase oversight, reduce systemic risk, and enhance consumer protections.

What does CFPB stand for, and which law created it?

The Consumer Financial Protection Bureau (CFPB) was created by the Dodd Frank Act of 2010 to consolidate and enforce consumer protection laws across financial services; it oversees practices such as mortgage lending, credit cards, and student loans, ensuring transparency and fairness while protecting individuals from abusive or deceptive practices.

The Glass -Steagall Act of 1933 created the FDIC and allowed commercial banks to enter investment banking

False

The Glass-Steagall Act of 1933 did create the FDIC, but it separated commercial and investment banking

The DIDMCA of 1980 phased out interest rate ceilings under Regulation Q

True

The DIDMCA of 1980 began phasing out Regulation Q interest rate ceilings, allowing market rates on deposits.

The Garn St Germain Act of 1982 reduced thrift powers and limited them to traditional mortgage lending

False

The Garn St Germain Act of 1982 actually expanded thrift powers, letting them engage in commercial real estate and consumer lending, which increased risk exposure.

The FDIC Improvement Act (FDICIA) of 1991 introduced Prompt Corrective Action (PCA) to force regulators to intervene earlier in weak banks

True

The FDIC Improvement Act (FDICIA) of 1991 introduced Prompt Corrective Action (PCA), requiring regulators to step in earlier as capital levels deteriorated.

Under the CAMELS system, a score of 5 indicates the bank is in strong condition with very little supervisory concern

False

Under CAMELS, a score of 1 is strongest and a score of 5 is weakest.

Basel II was designed to address weaknesses in Basel I by making capital requirements more risk -sensitive and incorporating supervisory review

True

Basel II was designed to address weaknesses in Basel I, making capital requirements more risk-sensitive and adding supervisory review and market discipline.

Basel III introduced liquidity requirements like the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR)

True

Basel III introduced new liquidity standards

In mid-2007, IndyMac’s Tier 1 risk-based capital ratio was below the regulatory minimum for well-capitalized banks

False

In mid-2007, IndyMac’s Tier 1 risk-based capital ratio was 8.3%, above the 6% well-capitalized threshold. The issue was that capital was thin relative to risk.

Brokered deposits are generally considered a stable, loyal source of core funding for banks

False

Brokered deposits are considered volatile “hot money” funding, not stable or loyal core deposits. They are prone to leave quickly in a crisis.

The CFPB was created under the Dodd-Frank Act of 2010

True

The CFPB was created under the Dodd Frank Act (2010) to consolidate and enforce consumer financial protections.

The main problem with Regulation Q (before DIDMCA) was:

It capped interest rates on deposits, causing funds to flow to money market funds

The Garn–St Germain Act of 1982:

Expanded thrift powers into commercial real estate and consumer lending

Prompt Corrective Action (PCA), introduced by FDICIA, was designed to:

Require regulators to intervene earlier as bank capital declined

Under the CAMELS framework, which category evaluates the quality of a bank’s board and risk controls?

Management

As of mid-2007, IndyMac’s funding was characterized by:

Heavy reliance on brokered deposits and Federal Home Loan Bank advances

Basel I required banks to hold:

8% capital relative to risk-weighted assets

Basel II was criticized because:

It relied heavily on credit ratings and internal risk models

Basel III introduced all of the following EXCEPT:

Prompt Corrective Action (PCA)

The creation of the CFPB was part of which law?

Dodd–Frank Act (2010)

Which of the following is TRUE about Utah Industrial Banks (IBs)?

They allow commercial firms and fintechs to own banks

Basel I’s 8% capital requirement applied to which measure?

Risk-weighted assets (RWA)

Which weakness of Basel I most directly led to Basel II?

It treated all corporate loans as equally risky regardless of credit quality

Under Basel II, the “Three Pillars” included:

• Minimum capital requirements

• Supervisory review

• Market discipline

Basel III introduced which new regulatory concepts for the first time?

Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

The purpose of the countercyclical capital buffer (under Basel III) is to:

Force banks to hold extra capital during credit booms