CORES Basel Framework & Capital Requirements 5

Question 1

Under Basel III, Additional Tier 1 (AT1) capital instruments must contain what feature that allows regulators to trigger loss absorption?

Accepted Answer

A write-down or conversion to common equity trigger at or before point of non-viability (PONV)

Answer

AT1 instruments must include contractual triggers that allow write-down or conversion to CET1 at the point of non-viability to qualify as regulatory capital.

Question 2

Which Basel I concept was criticized for allowing significant regulatory capital arbitrage through securitization?

Accepted Answer

The bucket-based risk weight system with limited differentiation within credit categories

Answer

Basel I's crude bucket-based risk weights (0%, 20%, 50%, 100%) enabled banks to securitize high-quality assets and retain lower-quality ones with the same capital charge.

Question 3

The Basel FRTB framework introduced a P&L attribution test. What happens if a bank's trading desk fails this test?

Accepted Answer

The desk must switch from the IMA to the SA for capital calculation purposes

Answer

Under FRTB, a trading desk that fails the P&L attribution test must use the Standardized Approach rather than the Internal Models Approach for capital purposes.

Question 4

Under Basel III, which of the following is NOT eligible for inclusion as High-Quality Liquid Assets (HQLA) in the Level 1 category?

Accepted Answer

Covered bonds rated AA- or higher

Answer

Covered bonds rated AA- or higher are classified as Level 2A HQLA, not Level 1, because they are subject to a 15% haircut.

Question 5

In the Basel III capital framework, what is the consequence for a bank whose CET1 ratio falls within the capital conservation buffer zone?

Accepted Answer

The bank faces restrictions on discretionary distributions such as dividends, buybacks, and bonuses

Answer

When CET1 falls into the conservation buffer zone (4.5%–7%), banks face restrictions on distributions to preserve capital.

(CORES) Certified Operational Risk Executive Specialist Practice Test

(CORES) Certified Operational Risk Executive Specialist Practice Test

CORES Basel Framework & Capital Requirements 5