Basel iii( For test 3) Flashcards
List the overall proposals of Basel iii.
-Raising the quality, consistency, and transparency of the capital base.
-Supplementing the risk-based capital requirement with a leverage ratio.
-Introducing a global liquidity standard.
-Procyclicality.
-Risk Coverage
Why did Basel introduce a global liquidity standard?
Prior to the global crises in 2008-2009, assets buoyant and funding was readily available at low cost. The rapid reversal in market conditions illustrated how quickly liquidity can evaporate and that liquidity can last for an extended period of time. The banking system came under severe stress, which necessitated central bank action to support both the functioning of money markets and, in some cases, individual institutions.
What is the liquidity coverage ratio used for?
To promote short-run flexibility in a bank’s liquidity risk profile over a 30-day horizon.
What do the worst case scenario of the liquidity coverage entail?
-Run off of retail deposits
-Wholesale unsecured funding lost
-Increased market volatilities
-Unscheduled draws on committed but unused facilities
What is the net stable fund ratio used for?
To promote additional incentive for banks to use more stable sources of funding over a longer time horizon.
What do the worst case scenario of the net stable fund ratio entail.
-Significant decline in profitability/solvency arising from heightened risk exposures
-Potential debt, counterparty credit or deposit rating downgrade
-Material event which calls into question reputation or credit quality
According to Basel 3, what does the total regulatory capital consist of
- Tier 1 Capital
- Tier2 capital
- Capital conservation buffer
What are the types of Tier 1 Capital?
-Common Equity Tier 1
- Additional Tier 1
What are the components of Common Equity Tier 1?
-Common shares issued by the bank
-Stock surplus (share premium) resulting from the issue of instruments included in Common Equity Tier 1
-Retained earnings
-Accumulated other comprehensive income and other disclosed reserves
-Common shares issued by consolidated subsidiaries of the bank
-Regulatory adjustments applied in the calculation of Common Equity Tier 1
What are the components of Additional Tier 1 capital?
-Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 capital
-Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital
-Instruments issued by consolidated subsidiaries of the bank that meet the criteria for inclusion in Additional Tier 1 capital and are not included in Common Equity Tier 1.
-Regulatory adjustments applied in the calculation of Additional Tier 1 Capital
What is the the requirement for common equity tier 1?
It must be be at least 4.5% of the risk-weighted assets.
What is the the requirement for total equity tier 1?
It must be be at least 6% of the risk-weighted assets.
What are the components of Tier 2 capital?
-Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital
-Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital
-Instruments issued by consolidated subsidiaries of the bank that meet the criteria for inclusion in Tier 2 capital
-Certain loan loss provisions
-Regulatory adjustments applied in the calculation of Tier 2 Capital.
What is the the requirement for total capital( Tier1 plus tier 2) ?
It must be be at least 8% of the risk-weighted assets.
What are the elements of the minimum adequacy ratio?
-Tier 1
-Tier 2
- and Conservation buffer
What should the minimum adequacy ratio be according to Basel 3?
It must be be at least 10.5% of the risk-weighted assets.
