Question

Assume bank a has a 5 percent tier 1 leverage ratio and a large percentage of assets are invested in treasury securities. Bank B has an 8 percent Tier 1 leverage ratio and a large percentage of assets are invested in consumer debt. How would Bank A compare to Bank B base on the capital and asset quality criteria of the CAMELS system?

a- Bank A is safer based on both criteria

b- Bank B is safer based on both criteria

c- Bank A is safer according to capital but riskier according to asset quality

d- Bank B is safer according to capital but riskier according to asset quality

For a typical bank with more rate-sensitive liabilities than assets, the use of floating-rate loans is beneficial for all but which of the following reasons?

a- Interest rate risk is transformed into credit risk

b- Less need for other measures such as interest rate swaps, simplifying operations

c- Overall bank interest rate risk is lowered, resulting in better interest rate stress test results

d-Net interest margin does not fall as much when rates rise, helping maintain net income

Answer 1

As Tier 1 leverage ratio is used to measure the capital adequacy of a bank, a higher value of the same bodes well for the bank. Further, a large % of assets invested in treasury security is safer as compared to a large % of assets invested in consumer debts. Therefore, Bank A performs better in asset quality whereas Bank B performs better in capital quality. Hence, Bank B is safer according to capital but riskier according to asset quality.

Therefore, the correct option is (d).

NOTE: Please raise separate queries for the solution to the second unrelated question.