CORES Basel Framework & Capital Requirements 2 — Questions and Answers
Question 1: Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?
- 2.0%
- 4.5% (Correct answer)
- 6.0%
- 8.0%
Correct answer: 4.5%
Basel III requires banks to hold a minimum CET1 ratio of 4.5% of risk-weighted assets.
Question 2: Which Basel III buffer is designed to be drawn down during periods of economic stress and must be rebuilt during recovery?
- Countercyclical capital buffer
- Capital conservation buffer (Correct answer)
- Systemic risk buffer
- Pillar 2 add-on
Correct answer: Capital conservation buffer
The capital conservation buffer (2.5% of RWA) is designed to absorb losses during periods of stress and must be replenished afterward.
Question 3: The Basel III Leverage Ratio is calculated as Tier 1 capital divided by which denominator?
- Risk-weighted assets
- Total on-balance-sheet assets only
- Total exposure measure (on- and off-balance-sheet) (Correct answer)
- Tangible common equity
Correct answer: Total exposure measure (on- and off-balance-sheet)
The leverage ratio uses a total exposure measure that includes both on-balance-sheet assets and off-balance-sheet items.
Question 4: Under the Basel Standardized Approach for operational risk (Basel III revised framework), the Business Indicator Component (BIC) is calculated using which multiplier schedule?
- A flat 15% of average annual gross income
- Marginal coefficients of 12%, 15%, and 18% applied to BI buckets (Correct answer)
- 12% applied uniformly to net interest income only
- 18% applied to all revenue streams equally
Correct answer: Marginal coefficients of 12%, 15%, and 18% applied to BI buckets
The BIC applies marginal coefficients of 12%, 15%, and 18% to three progressive Business Indicator buckets.
Question 5: What is the primary purpose of the Net Stable Funding Ratio (NSFR) introduced under Basel III?
- Limit short-term liquidity mismatches within a 30-day stress horizon
- Promote resilience over a one-year horizon by requiring stable funding sources (Correct answer)
- Set a floor on the amount of liquid assets held at all times
- Restrict interbank lending to systemically important institutions
Correct answer: Promote resilience over a one-year horizon by requiring stable funding sources
The NSFR requires banks to maintain stable funding relative to their assets over a one-year horizon, reducing reliance on short-term wholesale funding.
Question 6: Basel II introduced the Three Pillars framework. Which pillar specifically covers market discipline through public disclosure requirements?
- Pillar 1
- Pillar 2
- Pillar 3 (Correct answer)
- Pillar 4
Correct answer: Pillar 3
Pillar 3 of Basel II/III requires banks to publicly disclose risk exposures, capital adequacy, and risk management practices to enable market discipline.
Question 7: A G-SIB surcharge under Basel III adds additional CET1 requirements ranging from 1% to 3.5% based on what assessment?
- The bank's credit rating assigned by a recognized external rating agency
- The bank's systemic importance score across five indicator categories (Correct answer)
- The bank's leverage ratio relative to the industry median
- The bank's share of domestic retail deposits
Correct answer: The bank's systemic importance score across five indicator categories
G-SIB surcharges are determined by a systemic importance score derived from size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity.
CORES Basel Framework & Capital Requirements 2
Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?