Quick Quiz 1: Capital Adequacy
Quick Quiz 2: Capital Adequacy Zones (Prompt Corrective Action)

Capital Adequacy

Capital serves no real purpose.
True
False	Capital serves a number of purposes including serving as a cushion to absorb losses and declines in the value of assets.

Goodwill and other intangibles are included in tier 1 and tier 2 capital.
True
False	Goodwill and intangibles are excluded from tier 1 and tier 2 capital. That is, these ratios are calculated as if goodwill and other intangibles do not exist.

In the risk weighting process, there are six categories into which each asset and off-balance-sheet item may be placed.
True
False	There are four categories (0 percent, 20 percent, 50 percent, and 100 percent).

A bank is exposed to increasingly restrictive limitations, via prompt corrective action, as its tier 1 leverage, tier 1 risk-based, and/or total risk-based capital ratios drop below certain levels.
True
False	True. Well capitalized banks face fewer restrictions on their activities than do banks with lower capital levels.

If the tier 1 leverage, tier 1 risk-based, and total risk-based capital ratios are above the minimum levels, capital is considered adequate.
True
False	These are minimums, and these ratios do not take explicit account of the quality of individual asset portfolios or of other types of risk to which a bank may be exposed (including interest rate, liquidity, market and operational risks). Consequently, banks are generally expected to operate above these minimums.

The need for capital at Insights Bank and Trust is increasing with its Vision for Success program.
True
False	As the bank grows and more loans are booked, additional capital is needed. The increased liquidity risk also requires more capital.

Increased past-dues, nonaccruals, and classified assets generally require higher capital ratios.
	True
	False	True. Capital adequacy entails meeting certain minimum ratio standards. Those standards apply to banks that exhibit normal risks. Higher risk banks - those with high and increasing past-due loans, nonaccruals and classified assets. would be required to hold additional capital to compensate for their greater credit risk.

Capital Adequacy Zones (Prompt Corrective Action)

There are five PCA zones or categories.
	True
	False	The zones or categories are well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

To be in the well-capitalized zone, a bank needs to have a total risk-based capital ratio of 10 percent or more, a tier 1 risk-based capital ratio of 6 percent or more, and a tier 1 leverage ratio of 5 percent or more.
	True
	False	To be well capitalized, a bank also must also not be subject to an order, a written agreement, a capital directive, or a PCA directive.

The tier 1 and total risk-based capital ratios are not normally factors in a bank falling into the critically undercapitalized zone.
	True
	False	A bank is critically undercapitalized if its tangible equity capital to total average assets (less intangibles) is 2 percent or less.

A well-capitalized bank faces no restrictions from PCA on its use of brokered deposits or on rates it may offer and pay on deposits.
	True
	False	A Well capitalized bank faces no restrictions from PCA on its use of brokered deposits or on rates it may offer and pay on deposits.

A bank, regardless of whether its PCA category is undercapitalized, significantly undercapitalized, or critically undercapitalized, faces no restrictions on the payment of dividends to shareholders.
	True
	False	Undercapitalized and significantly undercapitalized banks must cease paying dividends. Critically undercapitalized banks cannot enter into a material transaction not in the usual course of business, such as the payment of dividends, without prior FDIC approval (which the FDIC would not be expected to grant).

If your bank is critically undercapitalized and in a failing condition, there are no PCA limitations on paying extra bonuses as a reward to those officers staying and helping your bank through this.
	True
	False	Such bonuses would likely need the FDIC's approval because they would be "excessive" and/or because they would be material transactions not in the normal course of business.

PCA was established to minimize deposit insurance losses by placing banks into receivership in a timely manner.
	True
	False	One of the reasons for the establishment of PCA was to minimize deposit insurance losses by getting banks into receivership in a timely manner.

Very few banks fall into the well-capitalized PCA category.
	True
	False	The vast majority of banks fall into the well-capitalized PCA category. It is very unusual for a bank not to be well-capitalized, and even more unusual for a bank to be in one of the three undercapitalized categories.

The table below shows the PCA capital zones (sometimes referred to as categories). Following the table is a discussion of applicable restrictions.

Prompt Corrective Action (PCA) Capital Adequacy Zones

Well-Capitalized – Total risk-based capital ratio is 10 percent or more, tier 1 risk-based capital ratio is 6 percent or more, and tier 1 leverage ratio is 5 percent or more. In addition to these ratio guidelines, to be well capitalized a bank cannot be subject to an order, a written agreement, a capital directive or a PCA directive.

Adequately Capitalized – Total risk-based capital ratio is at least 8 percent, tier 1 risk-based capital ratio is at least 4 percent, and tier 1 leverage ratio is at least 4 percent.

Undercapitalized – Total risk-based capital ratio is less than 8 percent, tier 1 risk-based capital ratio is less than 4 percent, or tier 1 leverage ratio is less than 4 percent.

Significantly Undercapitalized – Total risk-based capital ratio is less than 6 percent, tier 1 risk-based capital ratio is less than 3 percent, or tier 1 leverage ratio is less than 3 percent.

Critically Undercapitalized – Tangible equity capital to total average assets (less intangibles) is 2 percent or less.

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