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Banking and Financial Institutions > Topic 5: Management of Capital > Flashcards

Topic 5: Management of Capital Flashcards

1
Q

It is the net worth available to the equity holders

A

Bank Capital

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2
Q

It acts as a protection to the bank from unexpected risks and losses

A

Bank Capital

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3
Q

It gives assurance to the depositors and the creditors that their funds are safe, and it indicates the ability of the bank to pay for its liabilities

A

Bank Capital

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4
Q

It funds for expansion in banking operations or for the procurement of any assets

A

Bank Capital

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5
Q

More permanent in nature

A

Tier 1 Capital

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6
Q

It consists of common stock and disclosed reserves

A

Tier 1 Capital

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7
Q

Acts as primary support in the case of the absorption of losses

A

Tier 1 Capital

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8
Q

It can be depleted without placing the bank into insolvency or liquidation

A

Tier 1 Capital

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9
Q

Temporary or fluctuating in nature

A

Tier 2 Capital

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10
Q

It consists of funds that are not disclosed in the financial statements of the bank

A

Tier 2 Capital

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11
Q
  • revaluation reserves
  • undisclosed reserves
  • hybrid instruments
  • subordinated term debt
A

Tier 2 Capital

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12
Q

Also called Core Capital

A

Tier 1 Capital

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13
Q

Also called Supplementary Capital

A

Tier 2 Capital

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14
Q

Also called Supporting Capital

A

Tier 3 Capital

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15
Q

It is there to shield the market risk, commodity risk, and foreign currency risk

A

Tier 3 Capital

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16
Q

Who created the Basel Accords?

A

Basel Committee on Bank Supervision (BCBS)

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17
Q

It is a series of three international banking regulatory meetings that established capital requirements and risk measurements for global banks

A

Basel Accords

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18
Q

Also known as the Basel Capital Accord

A

Basel 1

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19
Q

When was Basel Capital Accord formed?

A

In 1988

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20
Q

Why is Basel 1 made?

A

It’s because there are a growing number of international banks and the increasing integration and interdependence of financial markets

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21
Q

It provided a framework for managing credit risk through the risk-weighting of different assets

A

Basel 1

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22
Q

It classifies an asset according to the level of risk associated with it

A

Basel 1

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23
Q

What is the risk weight percentage of Cash and Government Securities?

A

0%

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24
Q

What is the risk weight percentage of Public Debt?

A

10%

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25
Q

What is the risk weight percentage of Interbank Loans?

A

20%

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26
Q

What is the risk weight percentage of Residential Mortgages?

A

50%

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27
Q

What is the risk weight percentage of Private Sector Debt?

A

100%

28
Q

How much percentage is the risk-free assets?

A

0%

29
Q

How much percentage is the the very risky assets?

A

100%

30
Q

Banks that operate internationally must maintain capital (Tier 1 and Tier 2) equal to ______________ of their risk-weighted assets (RWA)

A

at least 8%

31
Q

is critical to ensure that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent

A

Capital Adequacy Ratio (CAR)

32
Q

What are the limitations of Basel 1?

A
  • The minimum capital requirements were determined by looking at credit risk only
  • It provided a partial risk management system, as both operational and market risks were ignored
33
Q

When was Basel 2 created?

A

June 26, 2004

34
Q

Also known as the International Convergence of Capital Measurement and Capital Standards: A Revised Framework

A

Basel 2

35
Q

What are the 3 main pillars of Basel 2?

A
  • Minimum Capital Requirements
  • Regulatory Supervision
  • Market Discipline
36
Q

What is the minimum capital adequacy requirement of the Risk-Weighted Assets

A

8%

37
Q

Occurs when a party fails to abide by the terms and conditions of a financial contract

A

Credit Risk

38
Q

Hazards companies face in their day to day operations

A

Operational Risk

39
Q

The losses a bank might suffer due to adverse changes in commodity prices, security prices, currencies, and interest rates

A

Market Risk

40
Q

Provides banks with more informed approaches to calculate capital requirements based on credit risk, while taking into account each type of asset’s risk profile and specific characteristics

A

Basel 2

41
Q

Involves the use of credit ratings from external credit assessment institutions for the evaluation of the creditworthiness of a bank’s debtor

A

Standardized Approach

42
Q

Banks use their own assessments of parameters such as the Probability of Default, Loss Given Default and Exposure at Default

A

Foundation Internal Ratings-Based Approach (FIRB)

43
Q

Banks use their own assessments for all risk components and other parameters

A

Advanced Internal Ratings-Based Approach (AIRB)

44
Q

Banks are obligated to assess the internal capital adequacy for covering all risks they can potentially face in the course of their operations

A

Regulatory Supervision (Basel 2)

45
Q

Responsible for ascertaining whether the bank uses appropriate assessment approaches and covers all risks associated

A

Supervisor

46
Q

A bank must conduct periodic internal capital adequacy assessments

A

Internal Capital Adequacy Assessment Process (ICAAP)

47
Q

Supervisors must review and evaluate the internal capital adequacy assessments, strategies, and their ability to monitor their compliance with the regulatory capital ratios

A

Supervisory Review and Evaluation Process (SREP)

48
Q

Banks must maintain their capital structure above the minimum level defined by Pillar 1

A

Capital above the minimum level

49
Q

Aims to ensure __________________ by making it mandatory to disclose market information

A

Market Discipline

50
Q

This is done done to make sure that the users of financial information receive the relevant information to make informed trading decisions

A

Market Discipline

51
Q

What are the limitations of Basel 2?

A
  • Too much regulatory compliance
  • Over-focused on credit risk
  • Complex and demanding for supervisors and unsophisticated banks
52
Q

Why was Basel 3 created?

A

Because of the Global Financial Crisis of 2008 that exposed the weaknesses of the international financial system

53
Q

Introduced a set of reforms designed to improve the regulation, supervision, and risk management within the banking sector

A

Basel 3

54
Q

Helps handle shocks form financial stress and to strengthen their transparency and disclosure

A

Basel 3

55
Q

What are the 3 pillars for Basel 3?

A
  • Enhanced Minimum & Liquidity Requirements
  • Enhanced Supervisory Review Process
  • Enhanced Risk Disclosure & Market Discipline
56
Q

Under Basel 3, the minimum total capital ratio is _____

A

12.9%

57
Q

Under Basel 3, the minimum Tier 1 capital ratio is ____ of its RWA

A

10.5%

58
Q

Under Basel 3, the minimum Tier 2 capital ratio is of the RWA

A

2%

59
Q

During periods of __________________, banks must set aside additional capital

A

Credit Expansion

60
Q

During periods of __________________, capital requirements must be relaxed

A

Credit Contraction

61
Q

Reduces the risk of such periods of deleveraging in the future and the damage they inflict on the broader financial system and economy

A

Leverage Ratio

62
Q

Intended to reinforce the risk-based capital requirements with a simple, non-risk-based “backstop”

A

Leverage Ratio

63
Q

enhances banks’ short-term resilience by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting for one month (30 days)

A

Liquidity Coverage Ratio

64
Q

promotes banks’ long-term reliability by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis

A

Net Stable Funding Ratio

65
Q

portion of its capital and liabilities that will remain with the institution for more than one year

A

Available Stable Funding

66
Q

based on the composition of the assets on the bank’s balance sheet

A

Required Stable Funding

Banking and Financial Institutions (7 decks)

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