Question

Question 6 2 pts Which of the following statements is true about capital requirements? Regulators prefer higher capital requirements because it provides an additional cushion to absorb losses. Bankers prefer higher capital because it is the least expensive source of financing. Higher capital requirements increase credit risk. Risk-based capital requirements allow banks ignore off-balance sheet commitments. Question 7 2 pts Why can banks with greater equity financing borrow funds cheaper than other banks? Because they have proportionately more financial leverage and hence less risk. Because a greater proportion of their assets have to be in default before they fail. Because they have less credit risk. Because they have lower required reserves.

Question 10 question still Yes or No

Answer 1

Question 6:

The correct statement is 'Regulators prefer higher capital requirements as it provides an additional cushion to absorb losses". Although higher capital requirements limit a bank' ability to make money and raise their compliance costs, it also improves solvency of the bank and helps it avoid defaults.

Question 7:

The correct answer is "Because they have less credit risk". Bank with higher equity financing have lower financial leverage and hence can borrow at more attractive rates than more leveraged banks.

Tier 1 capital = $120M

Tier 2 capital = $50M

Risk-weighted assets = $1,590M

Tier 1 capital ratio = Tier 1 capital / Risk-weighted assets

Tier 1 capital ratio = 120/1,590 = 7.55%

As Tier 1 capital ratio requirement is 8.5%, the bank does not have sufficient capital according to the Basel III standards. The answer is "No".

Question 10:

Tier 1+2 capital ratio = (Tier 1 capital+Tier 2 capital) / Risk-weighted assets

Tier 1+2 capital ratio = (120+50)/1,590 = 10.69%

As Tier 1+2 capital ratio requirement is 10.5%, the bank has sufficient capital according to the Basel III standards. The answer is "Yes".