CRA Regulatory Capital Requirements 3 — Questions and Answers
Question 1: Under Basel II/III's Internal Ratings-Based (IRB) approach, which parameter represents the proportion of exposure lost if a borrower defaults?
- Probability of Default (PD)
- Loss Given Default (LGD) (Correct answer)
- Exposure at Default (EAD)
- Maturity (M)
Correct answer: Loss Given Default (LGD)
LGD (Loss Given Default) measures the fraction of the exposure that the bank expects to lose after recovery efforts.
Question 2: Global Systemically Important Banks (G-SIBs) are subject to an additional capital surcharge of up to:
- 1.0%
- 2.5% (Correct answer)
- 3.5%
- 5.0%
Correct answer: 2.5%
G-SIBs face a CET1 surcharge ranging from 1.0% to 3.5%, with a 4.5% bucket reserved for future use, totaling up to 3.5% for most banks.
Question 3: Which component of the Basel III framework specifically addresses the risk of excessive bank leverage during periods of growth?
- Liquidity Coverage Ratio
- Leverage Ratio (Correct answer)
- Net Stable Funding Ratio
- Capital Conservation Buffer
Correct answer: Leverage Ratio
The Basel III Leverage Ratio (minimum 3%) acts as a backstop to risk-based capital measures, limiting excessive balance sheet leverage.
Question 4: Under the standardized approach for credit risk, what risk weight is assigned to sovereign exposures rated AA- or better?
- 0% (Correct answer)
- 20%
- 50%
- 100%
Correct answer: 0%
Sovereign exposures from countries rated AA- or better receive a 0% risk weight under the standardized approach.
Question 5: Which Pillar of the Basel framework 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 requires banks to publicly disclose their risk exposures, capital adequacy, and risk management practices to enhance market discipline.
Question 6: The capital conservation buffer of 2.5% under Basel III is composed of:
- Tier 2 capital only
- Common Equity Tier 1 capital only (Correct answer)
- Any combination of Tier 1 and Tier 2 capital
- Additional Tier 1 capital only
Correct answer: Common Equity Tier 1 capital only
The capital conservation buffer must be composed entirely of CET1 capital, making the combined CET1 minimum effectively 7% (4.5% + 2.5%).
Question 7: In the context of operational risk capital, the Basic Indicator Approach (BIA) uses what metric as its basis?
- Total assets
- Gross income averaged over three years (Correct answer)
- Net interest income
- Total risk-weighted assets
Correct answer: Gross income averaged over three years
The BIA calculates operational risk capital as 15% of average annual gross income over the previous three years.
CRA Regulatory Capital Requirements 3
Under Basel II/III's Internal Ratings-Based (IRB) approach, which parameter represents the proportion of exposure lost if a borrower defaults?