Basel II

Question 1

Piller I

Answer 1

Minimum Capital Requirements

Question 2

Piller II

Answer 2

Supervisory Review

Question 3

Piller III

Answer 3

Market Discipline

Question 4

Capital Adequecy Ratio (CAR)

Answer 4

Regulatory capital/Risk weighted Assets >= 8%

Question 5

IRB

Answer 5

Internal Ratings Based

Question 6

BIA

Answer 6

Basic Indicator Approach

Question 7

TSA

Answer 7

The Standardized Approach

Question 8

AMA

Answer 8

Advanced Measurement Approaches

Question 9

Bank Balance Sheet Statement

Answer 9

Loan (Assets) = Deposits (Liabilities) + Equity (Capital); if, loss (from defaulting loan) > profits (form non-defaulting loans), then it will lead to reduction in capital

Question 10

Regulatory Capital

Answer 10

The amount that is required to meet regulatory requirements. Economic capital is the amount of capital required to cover unexpected losses.

Question 11

Expected Loss

Answer 11

Loss due to expected events; to be covered by new margin income

Question 12

Unexpected Loss

Answer 12

Loss due to unexpected events and economic capital covers unexpected losses

Question 13

Extreme Loss

Answer 13

Potential unexpected losses against which it would be uneconomical to hold capital; it is too expensive to cover

Question 14

Tier 1

Answer 14

Add(Common equity, disclosed reserves, noncumulative perpetual preferred stock) and deduct (Goodwill)

Question 15

Tier 2

Answer 15

Upper Tier 2-perpetual subordinated debt and undisclosed reserves; Lower Tier 2-Subordinated term debt

Question 16

Tier 3

Answer 16

Subordinated debt maturity over two years

Question 17

Overall Tier 2 Capital

Answer 17

Overall Tier 2 capital cannot exceed 100% of tier 1 capital

Question 18

Upper Tier 2 Capital

Answer 18

Upper tier 2 capital is limited to 100% of tier 1 capital

Question 19

Lowe Tier 2 Capital

Answer 19

Lower tier 2 capital cannot exceed 50% of tier 1 capital

Question 20

Tier 2 Capital

Answer 20

Tier 3 capital is limited to 250% of a banks tier 1 capital requirement

Question 21

Charge for market risk (Capital charge); (1/8) = 12.5

Answer 21

Charge for market risk = (1/CAR)

Question 22

Minimum Requirement under Basel II

Answer 22

8% total capital charge; 4% minimum Tier 1 ratio; 2% minimum common equity ratio

Question 23

Minimum Requirement changed under Basel III

Answer 23

8% total capital charge (unchanged); more than 4% minimum Tier 1 ratio; more tham 2% minimum common equity ratio

Question 24

Example for Minimum Capital Requirements under Basel II

Answer 24

Risk Weighetd Asset (RWA) 100 billion, Capital charge (Market risk) 100 million, Capital charge (Operational risk) 300 million; [RWA+(CCMR12.5)+(CCOR12.5)]*8%