Credit Risk Management Basel Regulatory Framework

Question 1

Under Basel II, which approach allows banks to use their own estimates of PD, LGD, and EAD?

Accepted Answer

Advanced IRB approach

Answer

The Advanced Internal Ratings-Based (A-IRB) approach permits banks to estimate all three key parameters (PD, LGD, EAD) internally, subject to supervisory approval.

Question 2

What is the minimum Tier 1 capital ratio required under Basel III?

Accepted Answer

6%

Answer

Basel III requires a minimum Tier 1 capital ratio of 6% of risk-weighted assets, strengthening capital quality requirements from Basel II.

Question 3

Under the Basel Standardized Approach for credit risk, what risk weight is applied to claims on sovereigns rated AA− to AA+?

Accepted Answer

0%

Answer

Sovereigns rated AA− or better receive a 0% risk weight under the Basel Standardized Approach, reflecting their very low default risk.

Question 4

What does the Basel III leverage ratio measure?

Accepted Answer

Tier 1 capital as a percentage of total exposure (non-risk-based)

Answer

The Basel III leverage ratio is a non-risk-based backstop measure defined as Tier 1 capital divided by total exposure, with a minimum requirement of 3%.

Question 5

Which Basel III buffer requires banks to build capital during good times to draw on during stress?

Accepted Answer

Countercyclical capital buffer

Answer

The countercyclical capital buffer (CCyB) requires banks to accumulate capital during credit booms, reducing procyclicality in the financial system.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Basel Regulatory Framework