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Reading 17: analysis of financial institutions Certification Exam Review Questions And Answers Accurately Solved.
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what are 3 important highlights of Basel 3 - correct answer Three important highlights of Basel III are the minimum capital requirement, minimum liquidity, and stable funding. what is the CAMELs approach - correct answer ...

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  • August 12, 2024
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Reading 17: analysis of financial
institutions

what are 3 important highlights of Basel 3 - correct answer Three important
highlights of Basel III are the minimum capital requirement, minimum liquidity, and stable funding.



what is the CAMELs approach - correct answer "CAMELS" is an acronym for
the six components of a widely used bank rating approach originally developed in the United States.12
The six components are Capital adequacy, Asset quality, Management capabilities, Earnings sufficiency,
Liquidity position, and Sensitivity to market risk.



A bank examiner using the CAMELS approach to evaluate a bank conducts an analysis and assigns a
numerical rating of 1 through 5 to each component. A rating of 1 represents the best rating, showing the
best practices in risk management and performance and generating the least concern for regulators.



what is "capital adequacy" - correct answer "Capital adequacy," described in
terms of the proportion of the bank's assets that is funded with capital, indicates that a bank has enough
capital to absorb potential losses without severely damaging its financial position.



what is "asset quality" - correct answer "Asset quality" includes the concept of
quality of the bank's assets—credit quality and diversification—and the concept of overall sound risk
management.



what is "Management capabilities" - correct answer "Management
capabilities" refers to the bank management's ability to identify and exploit appropriate business
opportunities and to simultaneously manage associated risks.



what is "Earnings" - correct answer "Earnings" refers to the bank's return on
capital relative to cost of capital and also includes the concept of earnings quality.



what is "Liquidity" - correct answer "Liquidity" refers to the amount of liquid
assets held by the bank relative to its near-term expected cash flows. Under Basel III, liquidity also refers
to the stability of the bank's funding sources.

, what is "Sensitivity to market risk" - correct answer "Sensitivity to market risk"
pertains to how adverse changes in markets (including interest rate, exchange rate, equity, and
commodity markets) could affect the bank's earnings and capital position.



what are types of common equity tier 1 capital - correct answer (best type)
Common Equity Tier 1 Capital includes common stock, issuance surplus related to common stock,
retained earnings, accumulated other comprehensive income, and certain adjustments including the
deduction of intangible assets and deferred tax assets.



what are types of tier 2 capital - correct answer Tier 2 Capital includes
instruments that are subordinate to depositors and to general creditors of the bank, have an original
minimum maturity of five years, and meet certain other requirements.



what are the three categories for financial assets under IFRS - correct answer
The three categories for financial assets are (1) measured at amortized cost, (2) measured at fair value
through other comprehensive income (FVOCI), and (3) measured at fair value through profit and loss
(FVTPL).



Is the GAAP accounting the same way? - correct answer No, under US GAAP,
the three categories used to classify and measure investments apply only to debt securities: held to
maturity (measured at amortized cost), trading (measured at fair value through net income), and
available for sale (measured at fair value through other comprehensive income).



how are equity investments accounted for under GAAP - correct answer In
contrast to IFRS, US GAAP require all equity investments "(except those accounted for under the equity
method of accounting or those that result in consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income."



Another exception to fair value measurement is that an equity investment without a readily
determinable fair value can be measured at cost minus impairment.



what is the liquidity coverage ratio (LCR) - correct answer The Liquidity
Coverage Ratio (LCR) is expressed as the minimum percentage of a bank's expected cash outflows that
must be held in highly liquid assets. For this ratio, the expected cash outflows (the denominator) are the
bank's anticipated one-month liquidity needs in a stress scenario, and the highly liquid assets (the

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