Banking - capital requirements: Pillar I

Question 1

What is pillar I of the three Basel pillars?

Answer 1

Minimum capital and liquidity requirements

Question 2

Explain the first pillar of Basel pillars

Answer 2

The goal is financial satiability

It sets out minimal capital requirements to meet potential losses caused by credit-, market- or operational risk and also minimum liquidity requirements

Question 3

What is the minimum capital requirement according to pillar 1?

Answer 3

total capital ration at least 8%

Question 4

How do you calculate if the total capital ratio and what dose it have to be?

Answer 4

TCR = Own funds/risk-weighted exposure amounts >= 8%

Question 5

How is the definition of own funds in regards to pillar I

Answer 5

Its not equity in the classical sense

own funds are tier 1 capital + tier 2

Question 6

What are tier 1 assets?

Answer 6

They can be split in 2

Common equity tier 1 and additional tier 1 capital

Question 7

Taking into account the definition of own funds in regards to pillar I is there neccesary split that has to be achieved in regards to tier 1 and tier 2 assets?

Answer 7

Yes, tier 1 has to be at least 6%

Common equity capital ratio at least 4,5%

Question 8

how do you calculate the risk weighted exposure assets to insert into the TCR formula?

Answer 8

Credit risk + market and operational risk * 12,5

Question 9

What is credit risk?

Answer 9

The risk that a bank will incur losses because a counterparty does not pay back a loan.

different types of assets have different risk-weighting depending on the inherent, potential credit risk

Loans to governments are 0% for example while housing loans can be 35%

Question 10

how does the standardized approach work in regards rating methods and risk weight?

Answer 10

I believe the icelandic banks use the standardized approach

you get external rating - credit info for example

and the risk weight is prescribed

for example:
A+ rating
100 USD loan
risk wight for A+ is 50%
the risk weighted asset is therefore 50
50x8% = 4,0

Question 11

What is market risk?

Answer 11

Risk that a bank incurs losses on positions arising from movements in traded assets for example. commodity prices, bonds, stocks and such

Question 12

What is operational risk?

Answer 12

Risk that a bank incur losses from inadequate or failed internal processes, people or systems, or external events.

The standardized approach for minimal capital requirements here is that a bank is split into 8 business lines and the the minimum requirement would be 12%, 15% or 18% of gross income of each line