Chapter 12 - Capital Flashcards
How are the minimum capital requirements calculated in Basel II
Eg. Total regulatory capital >=8% * (credit risk weighted assets + market risk weighted assets + operational risk weighted assets)
How do you calculate the capital adequacy ratio
Total regulatory capital or CET 1
/
(Credit risk weighted assets + market risk weighted assets + operational risk weighted assets)
>= 8%
How does the standardized credit risk method vary from Basel I to Basel II
In Basel II borrowers credit ratings can also be used to determine risk weighting which is more accurate
How does the internal ratings based approach (IRB) work for calculating credit risk
Who needs to agree on this approach
Banks use their own internal measurements of a borrowers credit worthiness based off expected loss.
The PRA
What are the differences between the banking book and the trading book
The banking book is essentially loans and long term investments
The trading book, including cash and deriv securities trading portfolios are assumed to be liquid and held for trading
How would someone calculate
Which is the only market risk category to affect banking and trading books
Foreign exchange risk
How do you calculate Pillar 1 capital under the Basic Indicator Approach for operational risk in Basel II
Pillar 1 Capital = 15% * average annual gross income for the last 3 years (excluding any loss making years)
How do you calculate Pillar 1 capital for operational risk under the standardized approach for Basel II
Pillar 1 Capital = average annual gross income for the past 3 years * (12 to 18)% calculated separately for eight business lines and then accumulated
Negative numbers may be offset against positive numbers
How do you calculate the additional capital requirement under Pillar 2 of Basel II for operational risk
Notional operational RWA = total capital requirement / 8%
What are the minimum capital requirement percentages for Basel III
Total regulatory capital >= 8% RWA
Tier 1 regulatory capital >= 6% RWA
Common equity tier 1 capital >= 4.5% RWA
How do you calculate the leverage ratio for Basel requirements
What must this be topped up by
Leverage ratio = T1 capital / total exposure *100% >= 3% (but needs topping up in UK)
Topped up by:
35% of systemic risk buffer percentage
35% of counter cyclical buffer percentage
At least 75% of the minimum leverage must be met by CET 1 capital
How do you calculate total exposure to go into the leverage ratio for regulatory reporting
Total exposure = total assets from SOFP +- adjustment for regulatory measurement of derivatives + off- balance sheet exposures
What are the 3 levels for LCR and how are they capped
What happens if cap is hit
Level 1
Level 2A
Level 2B (capped at 15% of total HQLA)
2A + 2B capped at 40% of total HQLA)
If cap is reached then divide level 1 by 60% to get HQLA figure
What is the LCR
How do you calculate it
What is the requirement
Liquidity coverage ratio
LCR = HQLA / net cash outflows over next 30 days (inflows capped to 75% of outflows)
Must be less than 100%
