Chapter 15The Management of CapitalFill in the Blank Questions1.The risk that has to do with banks trading in foreign currencies is called _. Answer: exchange risk 2.The risk that has to do with fraud, embezzlement and bank robberies is called _. Answer: crime risk 3._ is measured by the par value of the shares of common equity outstanding. Answer: Common stock 4._ is the amount in excess of par value paid by the banks shareholders. Answer: Surplus 5._ are the net earnings of the bank which have been kept by the bank rather than distributed as dividends to stockholders. Answer: Undivided Profits (or retained earnings) 6.Core capital such as common stock, surplus, undivided profits, qualifying noncumulative preferred stock, etc. is referred to as _ capital as defined by the Basel agreement. Answer: Tier 1 7.The international treaty involving the U.S. and 11 other leading industrialized countries to impose common capital requirements on all banks is known as the _. Answer: Basel Agreement 8.Supplemental capital such as the allowance for loan losses, subordinated debt, mandatory convertible debt, intermediate-term preferred stock, cumulative preferred perpetual stock and equity notes is more commonly known as _. Answer: Tier 2 capital 9.When items on a banks balance sheet are multiplied by the appropriate risk-weighting factor they are often called _. Answer: risk-weighted assets 10.The fact that a bank may suffer deficiencies in quality control, inefficiencies in producing and delivering of services, weather damage, aging or faulty computer systems, errors in judgment by management and fluctuations in economy that could adversely affect the banks performance is known as _ risk. Answer: operational 11.One defense against risk for the bank is to spread out a banks credit accounts and deposits among a wide variety of customers, including large and small accounts different industries, etc. This defense is known as _. Answer: portfolio diversification 12.One defense against risk is for the bank to seek out customers located in different communities or in different countries. This defense is known as _. Answer: geographic diversification 13.When all else fails, the ultimate defense against risk in banking is _. Answer: owners capital (net worth) 14.The largest component of capital among thrift institutions is _. Answer: retained earnings 15.The largest component of capital among banks is _. Answer: surplus 16._ models attempt to measure price or market risk of a portfolio of assets and attempt to determine the maximum loss they might sustain over a designated period of time. Answer: Value at risk (VaR) 17.The latest revision to the Basel accord is known as _ and will affect only about 20 of the largest U.S. banks and a handful of leading foreign banks.Answer: Basel II 18._ models measure lender exposure to defaults or credit downgrades. Answer: Credit Risk 19.Credit risk models will be _ widely used when Basel II takes effect. Answer: more 20. At the center of the debate of the Basel Agreement is the , headquartered in Basel Switzerland , which assists central banks in their transactions with each other and serves as a forum for international financial issues.Answer: Bank for International Settlements (BIS)21. represents funds set aside for contingencies such as legal action against the institution as well as providing a reserve for dividends expected to be paid but not yet declared and a sinking fund to retire stock or debt in the future.Answer: Equity reserves22. are debt securities repayable from the sale of stock.Answer: Equity commitment notes23. is a hybrid form of equity capital issued to investors through a trust company, The funds raise are loaned to the financial firm. Dividends paid to stockholders on this time of capital are tax deductible.Answer: Trust preferred stock24. is long-term debt capital whose claims legally follow claims of depositors.Answer: Subordinated notes and debentures25. for banks include mortgage servicing rights