Question

The main ways in which banks can meet countercyclical capital buffer requirements include:

1. Reduce their voluntary capital buffers, leaving overall capital ratios unchanged.
2. Raise capital, through equity issues or higher retained earnings.
3. Reduce risk-weighted assets, by reducing exposures (including lending).
4. Rebalancing away from higher risk-weighted assets.
5. All of the answers.

Which of the following represent off-balance-sheet activities of commercial banks?

1. A customer deposits $1 million in a regular bank deposit account.
2. A customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank.
3. The bank makes a loan for $1 million.
4. The bank securitizes the loan as a pool of loans that are sold off to investors.
5. Both (b) and (d).

Answer 1

1. The main ways in which banks can meet counter cyclical capital buffer requirements include

All of the answers.

They can reduce their voluntary capital buffers, leaving overall capital ratios unchanged; they can raise capital, through equity issues or higher retained earnings; they can reduce risk-weighted assets, by reducing exposures (including lending) and re balancing away from higher risk-weighted assets.

The counter cyclical capital buffer is for protecting the banking sector against potential future losses caused by cyclical systemic risks or to cover losses that arise during stress period and for continue supplying credit.

2. Off-balance-sheet activities of commercial banks represents the collection of income-generating activities such as assets, debts or financing activities that do not appear on a bank's balance sheet.

These are Both B and D

A customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank.

The bank securitizes the loan as a pool of loans that are sold off to investors- Through securitization, a bank can get rid of the assets and liabilities from the balance sheet. It is a balance sheet restructuring tool that can reduce the cost of capital of the economy.