Credit Risk Management Basel Regulatory Framework 2 — Questions and Answers
Question 1: What is the capital conservation buffer (CCB) requirement under Basel III?
- 1%
- 1.5%
- 2.5% (Correct answer)
- 3.5%
Correct answer: 2.5%
Basel III mandates a 2.5% capital conservation buffer on top of minimum CET1, intended to absorb losses during financial stress.
Question 2: Under CECL (Current Expected Credit Loss) accounting in the US, when must lifetime expected losses be recognized?
- Only when a loan is 90+ days past due
- Only when a loan is classified as substandard
- At loan origination, for the full expected life (Correct answer)
- When a loan is placed on non-accrual status
Correct answer: At loan origination, for the full expected life
CECL requires financial institutions to recognize lifetime expected credit losses at origination, replacing the incurred loss model.
Question 3: What is the risk weight for unrated corporate exposures under the Basel II Standardized Approach?
- 20%
- 50%
- 100% (Correct answer)
- 150%
Correct answer: 100%
Unrated corporate claims receive a 100% risk weight under the Basel Standardized Approach, reflecting uncertain credit quality.
Question 4: Which Basel III requirement specifically targets short-term liquidity resilience?
- Net Stable Funding Ratio (NSFR)
- Liquidity Coverage Ratio (LCR) (Correct answer)
- Leverage Ratio
- Capital Conservation Buffer
Correct answer: Liquidity Coverage Ratio (LCR)
The LCR requires banks to hold sufficient high-quality liquid assets (HQLA) to survive a 30-day stress scenario, addressing short-term liquidity risk.
Question 5: Under the Basel IRB approach, Unexpected Loss (UL) is covered by what?
- Loan loss provisions
- Regulatory capital (Correct answer)
- Retained earnings
- Tier 2 instruments
Correct answer: Regulatory capital
Regulatory capital under Basel IRB is designed to cover Unexpected Loss — losses that exceed Expected Loss — to a high confidence level.
Question 6: What is the primary purpose of Basel III's Net Stable Funding Ratio (NSFR)?
- Limit short-term borrowing in money markets
- Ensure long-term funding stability over a one-year horizon (Correct answer)
- Require banks to hold more government bonds
- Cap the size of trading books
Correct answer: Ensure long-term funding stability over a one-year horizon
The NSFR requires banks to fund their assets with stable funding sources over a one-year horizon, reducing maturity transformation risk.
Credit Risk Management Basel Regulatory Framework 2
What is the capital conservation buffer (CCB) requirement under Basel III?