CORES Basel Framework & Capital Requirements 4

Question 1

A bank's operational risk capital charge under the Basel III Standardized Approach (SMA) is increased by what factor for institutions with large historical losses?

Accepted Answer

Internal Loss Multiplier (ILM), which can be greater than 1

Answer

The Internal Loss Multiplier (ILM) adjusts the SMA capital requirement upward or downward based on the bank's historical loss experience relative to the BIC.

Question 2

Under Basel market risk rules (FRTB), which approach requires banks to model non-linearities and correlations using an Expected Shortfall (ES) measure?

Accepted Answer

Internal Models Approach (IMA)

Answer

The FRTB Internal Models Approach uses Expected Shortfall at a 97.5% confidence level instead of Value-at-Risk to better capture tail risk.

Question 3

Under Basel III, Tier 2 capital instruments must have a minimum original maturity of how many years?

Accepted Answer

5 years

Answer

Tier 2 capital instruments must have a minimum original maturity of at least 5 years to qualify.

Question 4

Which Basel concept describes the risk that a bank's model underestimates capital needs due to systematic flaws in its risk measurement methodology?

Accepted Answer

Model risk

Answer

Model risk refers to the potential for losses arising from errors or limitations in risk models used to estimate capital requirements.

Question 5

The Basel Committee's 'output floor' introduced in the 2017 Basel III finalization requires that IRB-based RWA cannot fall below what percentage of the standardized approach RWA?

Accepted Answer

72.5%

Answer

The output floor sets a minimum at 72.5% of the standardized approach RWA to limit the capital benefit banks can gain from internal models.

(CORES) Certified Operational Risk Executive Specialist Practice Test

(CORES) Certified Operational Risk Executive Specialist Practice Test

CORES Basel Framework & Capital Requirements 4