Midterm 2

Question 1

G-SIFI

Answer 1

Global Systemically Important Financial Institution

Question 2

Capital Ratio

Answer 2

= Capital / Risk Weighted Assets

Must be greater than 8%

Question 3

Basel I: Tier 1 and Tier 2 Capital

Answer 3

Tier 1 Capital:
Common Stock*
Disclosed Reserves (e.g., retained earnings)

Tier 2 Capital::
permitted)
Undisclosed Reserves (if they exist/are
General loan-loss provisions
Hybrid debt capital instruments** Subordinated term debt with minimum maturity of 5 years***

issued and fully paid common stock and non-cumulative perpetual preferred stock
**total Tier 2 cannot exceed total Tier 1
**
e.g., cumulative perpetual preferred stock may be included only up to 50% of Tier 1

Question 4

leverage ratio

Answer 4

= Capital (equity) / Assets

Must be above 3%

Question 5

Could you briefly describe what changed between each round of Basel? (Basel I, II, III)

Answer 5

Very briefly, all three take a look at the risks banks take with their lending/asset side of the balance sheet (they also have some rules about capital, and for the exam, you don’t need to know much more than that about them). Basel I created four buckets of risk (OECD sovereign debt, OECD bank loans, residential mortgages, corporate debt), Basel II allowed some banks to use their internal risk models to evaluate their credit risk, and more importantly for our purposes, turned to credit rating agencies to evaluate the risks of their lending. Basel III retained the credit rating agency approach and brought back the leverage ratio and increased the capital adequacy requirements for the largest banks.

Question 6

Minimum Capital Under Basel 3

Answer 6

Common Equity Tier 1
(4.5%)

Additional Tier I
(1.5%)

Tier 2
(2.0%)

Question 7

Basel 3 Leverage Ratio

Answer 7

Tier 1 Capital / Exposure Measure