Lecture 4 P2

Question 1

Total Tier 1 capital >

Answer 1

6%

Question 2

Total Capital>

Answer 2

8%

-(Tier 1 capital plus Tier 2 capital)

Question 3

Off Balance sheet-market related assets?

Answer 3

• Interest rate contracts
• Foreign exchange contract
• Equity contracts
• precious metal contracts
• other commodity contracts
• other market-related contracts

Question 4

What activities generate off-balance sheet items?

Answer 4

• activites that generate revenue or expense without creation/holding an underlying asset or liability.
• Activity that does not create an asset or liability at present but may do so in the future (contingent claims)

Question 5

What activities generate off-balance sheet items?

Answer 5

• activites that generate revenue or expense without creation/holding an underlying asset or liability.
• Activity that does not create an asset or liability at present but may do so in the future (contingent claims)

Question 6

Credit Rating

Answer 6

• Independent assessment of the creditworthiness of a bond (note or any security of indebtness) by a credit rating agency.

Question 7

BASEL 111 developed because of?

Answer 7

a response to the deficiencies in financial regulation revealed by the global financial crisis.

Question 8

What does BASEL III do?

Answer 8

Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
&
builds on Basel I & II but does not replace them

Question 9

What part of the CAR equation does BASEL focus on?

Answer 9

numerator- tightened definition of eligible capital

Question 10

3 Pillars of BASEL II?

Answer 10

Pillar I : regulatory capital requirements
Pillar II : supervisory review process
Pillar III : market discipline

Question 11

What are the comparisons between BASEL I & II?

Answer 11

BASEL 1 
– Focus on a single measure
– One size fits all
– Broad-brush approach
BASEL II
– More emphasis on banks’ own internal risk models, supervisory review, and market discipline.
– Flexibility, menu of approaches, incentives for better risk management
– More risk sensitivity

Question 12

What are the comparisons between BASEL I & II?

Answer 12

BASEL 1 
– Focus on a single measure
– One size fits all
– Broad-brush approach
BASEL II
– More emphasis on banks’ own internal risk models, supervisory review, and market discipline.
– Flexibility, menu of approaches, incentives for better risk management
– More risk sensitivity

Question 13

BASEL primary objectives?

Answer 13

o Increase bank capital and reduce credit risk

o “level the playing field”- different required capital levels in other countries lead to unfair competition advantages.

Question 14

What are risk-weights are based on?

Answer 14

Risk-weights are based on credit rating grades or fixed weights broadly aligned with the likelihood of counterparty default;