CRA Regulatory Capital Requirements 5

Question 1

Which U.S. regulatory framework establishes minimum capital requirements for nationally chartered banks through the Prompt Corrective Action (PCA) provisions?

Accepted Answer

Federal Deposit Insurance Corporation Improvement Act (FDICIA)

Answer

FDICIA's PCA provisions establish five capital categories and mandate specific regulatory actions as a bank's capital deteriorates below defined thresholds.

Question 2

Under Basel III's Fundamental Review of the Trading Book (FRTB), which risk measure replaced VaR as the primary capital metric?

Accepted Answer

Expected Shortfall (ES)

Answer

FRTB replaced VaR with Expected Shortfall (ES) at a 97.5% confidence level to better capture tail risk and loss in extreme market conditions.

Question 3

A bank is classified as 'well capitalized' under U.S. PCA rules if its Total Risk-Based Capital ratio is at least:

Accepted Answer

10%

Answer

A U.S. bank is 'well capitalized' under PCA if its Total Risk-Based Capital ratio is at least 10%, Tier 1 ratio at least 8%, and CET1 at least 6.5%.

Question 4

What is the primary distinction between the Standardized Approach (SA) and the Foundation IRB (F-IRB) approach for credit risk capital?

Accepted Answer

SA uses supervisor-set risk weights; F-IRB uses bank-estimated PD with supervisor-set LGD and EAD

Answer

Under F-IRB, banks estimate their own PD but use regulatory-prescribed values for LGD, EAD, and maturity; the SA uses entirely regulatory-set risk weights.

Question 5

Which component of regulatory capital absorbs losses only in liquidation and does NOT protect depositors on a going-concern basis?

Accepted Answer

Tier 2 capital

Answer

Tier 2 capital (e.g., subordinated debt) absorbs losses only in a gone-concern (winding-up) scenario, unlike CET1 and AT1 which absorb losses on a going-concern basis.

(CRA) Certified Risk Analyst Practice Test

(CRA) Certified Risk Analyst Practice Test

CRA Regulatory Capital Requirements 5