06. Basels

Question 1

1988 - BIS Accord. Which were the 2 privisions?

Answer 1

1) minimum capital of risk - weighted amount
2) At least 50% of capital must be Tier 1. The regulation was saying that the safest form capital is Tier2, however, now, Credit Suiss is an exception, where Tier1 capital holders are more protected than debtors

Question 2

Which are the 3 types of capital? (Tier 1 , Tiern2, hibrid)

Answer 2

Tier 1: common equity, non-cumulative perpetual referred. (you have to reimburse - not obligtion to pay divident)
Tier 2: Cumulative preferred stock. (you have to renumerate)
Addicional Tier 1: ?

Question 3

Basel I?

Answer 3

Credit Risk and Market Risk.
- A risk weight is applied to each on-balance- sheet asset according to its risk (e.g. 0% to cash and govt bonds; 20% to claims on OECD banks; 50% to residential mortgages; 100% to corporate loans, corporate bonds, etc.)
-For bilateral OTC derivatives and off-balance sheet commitments, first calculate a credit equivalent amount is calculated and then a risk weight is applied.
Then calculate RWA.

Question 4

How do you calculate RWA?

Answer 4

– Sum of products of risk weight times asset amount for onbalance sheet items
– Sum of products of risk weight times credit equivalent amount
for derivatives and off-balance sheet commitments

Question 5

Basel II: three pillars

Answer 5

1) New minimum capital requirements for credit and operational risk (Risk weight on external or internal rating)
2) Supervisory review: Similar amount of thoroughness in different countries (local regulators can adjust parameters to suit local conditions)
3) Market discipline: more disclosure (Regulatory capital requirements, nature to capital held)

Question 6

Basel III?

Answer 6

Stricter operational capital requirements.

• More clear definition of capital requirements
  -Introduction of leverage ratio
  -Intro of liquidity ratio

Question 7

Define Capital conservation Buffer

Answer 7

Extra 2.5% of common equity required in normal times to absorb losses in periods of stress
If total common equity is less than 7% (=4.5%+2.5%) dividends are
restricted

Question 8

Define Countercyclical Buffer

Answer 8

-Extra equity capital to allow for cyclicality of bank earnings
-Can be as high as 2.5% of RWA
-Dividends restricted when capital is below required level

Question 9

Define Leverage Ratio

Answer 9

• Ratio of Tier 1 capital to total exposure (not risk weighted) must be greater than 3% (Higher in U.S. and UK)
• Exposure includes all items on balance sheet, derivatives exposures (calculated as in Basel I), securities financing exposures, and some offbalance sheet items