Ch.11 Market Risk Regulation

Question 1

What is the main object of regulation in Risk Regulation?

Answer 1

Capital

Question 2

What is the formula for equity?

Answer 2

Assets minus Liabilities.

Question 3

What is the purpose of the Basel Committe on Banking Supervision?

Answer 3

To agree on common financial standards and regulations.

Question 4

When was Basel I implemented and why?

Answer 4

1988. It was implemented because Japanese banks were stealing market shares from US and EU because of lower capital standards.

Question 5

What was the capital ratio set in Basel I?

Answer 5

8%

Question 6

What were the limitations of Basel I?

Answer 6

1. Only regulated credit risk, not market risk.
2. Imperfect risk weighting of assets.
3. Offered different incentives for financial engineering.

Question 7

When were VaR approach to market risk implemented? What VaR was implemented?

Answer 7

1996, 1% VaR over a 10 day period.

Question 8

What are the three pillars of Basel II?

Answer 8

1. Minimum Capital Requirements.
2. Supervisory Review Process (ensuring right measures of risk.)
3. Effective communication of risks.

Question 9

What are the three types of market risks covered by Basel II?

Answer 9

1. Credit Risk.
2. Market Risk.
3. Operational Risk.

Question 10

What are the 4 types of buffers which make up the total regulatory capital ratio?

Answer 10

Tier 1 and 2, Capital Conservation Buffer and Countercyclical Capital Buffer.

Question 11

What are the two types of Capital Ratios?

Answer 11

1. Leverage Ratio
2. Risk Weighted Ratio

Question 12

What is the formula for leverage Ratio?

Answer 12

Question 13

What is the formula for capital ratio?

Answer 13

Question 14

what is the formula for market risk capital in Basel II?

Answer 14