CORES Basel Framework & Capital Requirements 3 — Questions and Answers
Question 1: Under the Basel Internal Ratings-Based (IRB) approach for credit risk, which parameter does the bank estimate while regulators supply the others under the Foundation IRB (F-IRB)?
- Loss Given Default (LGD)
- Probability of Default (PD) (Correct answer)
- Exposure at Default (EAD)
- Effective Maturity (M)
Correct answer: Probability of Default (PD)
Under F-IRB, banks estimate only the Probability of Default (PD); LGD, EAD, and M are set by supervisors.
Question 2: The Basel III Liquidity Coverage Ratio (LCR) requires banks to hold sufficient High-Quality Liquid Assets (HQLA) to cover net cash outflows over what time period?
- 7 days
- 30 days (Correct answer)
- 90 days
- 1 year
Correct answer: 30 days
The LCR requires HQLA to cover projected net cash outflows over a 30-day stress scenario.
Question 3: Which Basel framework introduced the concept of 'Pillar 2' supervisory review, allowing regulators to impose capital requirements above Pillar 1 minimums?
- Basel I (1988)
- Basel II (2004) (Correct answer)
- Basel 2.5 (2009)
- Basel III (2010)
Correct answer: Basel II (2004)
Basel II (2004) established the three-pillar framework, introducing Pillar 2 supervisory review as a formal mechanism.
Question 4: In the context of Basel operational risk, the Advanced Measurement Approach (AMA) allowed banks to use which combination of data sources?
- External loss data only
- Internal loss data only
- Internal loss data, external loss data, scenario analysis, and business environment factors (Correct answer)
- Scenario analysis and regulatory stress tests only
Correct answer: Internal loss data, external loss data, scenario analysis, and business environment factors
The AMA required banks to incorporate internal loss data, external loss data, scenario analysis, and business environment and internal control factors (BEICFs).
Question 5: Under Basel III's revised standardized approach for credit risk, what risk weight is applied to unrated corporate exposures?
- 50%
- 75%
- 100% (Correct answer)
- 150%
Correct answer: 100%
Unrated corporate exposures receive a 100% risk weight under the revised Basel III standardized approach.
Question 6: What is the minimum Basel III Leverage Ratio requirement for internationally active banks?
- 2%
- 3% (Correct answer)
- 4%
- 5%
Correct answer: 3%
Basel III sets a minimum Tier 1 leverage ratio of 3% for internationally active banks.
Question 7: The countercyclical capital buffer (CCyB) under Basel III can range from 0% to what maximum percentage of risk-weighted assets?
- 1.5%
- 2.0%
- 2.5% (Correct answer)
- 3.5%
Correct answer: 2.5%
The CCyB can range from 0% to 2.5% of RWA, set by national authorities based on credit cycle conditions.
CORES Basel Framework & Capital Requirements 3
Under the Basel Internal Ratings-Based (IRB) approach for credit risk, which parameter does the bank estimate while regulators supply the others under the Foundation IRB (F-IRB)?