Topic 7 - Capital Adequacy

Question 1

Risk weight of cash, gold, balances at RBA, and short term government securities

Answer 1

0%

Question 2

Risk weight of longer term gov. securities and state government securities

Answer 2

10%

Question 3

Risk weight of claims on other banks + local gov organisations

Answer 3

20%

Question 4

Risk weight on mortgage loans

Answer 4

50%

Question 5

Risk weight on company/individual loans

Answer 5

100%

Question 6

Minimum Tier I Capital Ratio

Answer 6

4%

Question 7

Minimum Tier II Capital Ratio

Answer 7

8%

Question 8

Credit Equivalent Amount for Off-Balance Sheet Derivative

Answer 8

Credit equivalent amount of OBS derivative security items

$)= Potential exposure ($)+ Current exposure ($

Question 9

Basel III

Answer 9

• Improve bank ability to absorb shocks
• Improve risk management/governance
• Strengthen bank transparency & disclosure
• Min TI Ratio = 7$

Question 10

Basel II: Pillar 1

Answer 10

Calculation of min capital requirement

Question 11

Basel II: Pillar 2

Answer 11

Specifies importance of regulatory review

Question 12

Basel II: Pillar 3

Answer 12

Detailed guidance on disclosure

Question 13

Tier I Capital

Answer 13

• Book value of common equity
• Qualifying perpetual preferred stock
• Minority interest held in subsidiaries

Question 14

Tier II Capital

Answer 14

• Loan loss reserves (max 1.25% of RWA)

- Various convertible/subordinated debt instruments

Question 15

IRB Approach: Key Variables

Answer 15

Capital requirementi =f (Pdi , LGDi, Ri ,EADi ,Mi )

• Probability of default
• Loss given default
• Correlation to rest of economy
• $ Amount exposure
• Maturity of loan