Measuring Capital Adequacy

Question 1

what is the risk weight for off balance sheet items under B1 and B2?

Answer 1

50%

100%

Question 2

how do you calc credit equilvalent amounts for derivatives?

Answer 2

notional value of derivatives x potential exposure

then add replacement costs (ignore is negative)

times that amount by the risk weight

Question 3

Basel 1

Answer 3

Assets assigned to one of four categories of
credit risk exposure with the weight of 0 per cent, 20
per cent, 50 per cent, 100 per cent.
Criticisms :
•Risk-weights dependent on broad categories of borrowers.
•Basel I only takes into account credit risk, does not explicitly incorporate interest rate risk.
•Basel I fails to incorporate potential capital savings from loan portfolio diversification

Question 4

Basel II

Answer 4

widens differentiation of credit risks: refined to
incorporate external credit rating agency assessments.
Criticisms of the Basel II:
•Risk-weights, Risk weights based on external credit rating agencies,
•Portfolio aspects : fails to incorporate potential capital savings from loan portfolio diversification
•Countercyclical
•DI specialness,
•Other risks : Basel II does not explicitly incorporate interest rate risk, liquidity risk, foreign exchange risk and
systemic risk.
•Competition