Week 5 - Basell Capital regulation

Question 1

What is the risk asset ratio?

HINT: Republican Children Don’t Relish Womens’ Acceptance

Answer 1

Regulatory Capital/risk weighted assets

For Basel accords it must be greater than a regulatory minimum value

Question 2

What are some examples of Tier 1 capital? (5)

Hint: Only Real Cunts Revere Freud

Answer 2

Common Equity Tier:

1) Ordinary shares
2) Retained earnings
3) Current year earnings
4) Revaluation of securities reserves
5) Foreign conversion reserves

Question 3

What is the risk weighting for cash and loans to OECD governments under Basel I?

Answer 3

0

Question 4

What is the risk weighting for non OECD government loans, local authority lending and interbank lending under Basel I?

Answer 4

0.2

Question 5

What is the risk weighting for mortgages under Basel I?

Answer 5

0.5

Question 6

What is the risk weighting for commercial lending under Basel I?

Answer 6

1q

Question 7

What are the key issues with the risk weighting system employed under Basel I? (2)

Answer 7

1) Bucket style system was not sensitive enough because only 4 classes meant too broad.
2) Banks had an incentive to lend to the riskiest end of a given category to maximise profits without changing equity requirements

Question 8

How did Basel II and III improve on the risk weighting system of Basel I?

Answer 8

Weights within a given category are differentiated on the basis of credit rating.