Financial Risk Management Regulatory Capital and Basel 2

Question 1

What is the 'Liquidity Coverage Ratio' (LCR) under Basel III?

Accepted Answer

High Quality Liquid Assets / Net Cash Outflows over 30 days ≥ 100%

Answer

Net Stable Funding / Total Assets ≥ 100%

Answer

Tier 1 Capital / Short-term Borrowings ≥ 10%

Answer

Cash and Equivalents / Total Deposits ≥ 20%

Question 2

What is the 'Net Stable Funding Ratio' (NSFR) under Basel III?

Accepted Answer

Available Stable Funding / Required Stable Funding ≥ 100%

Answer

Short-term Funding / Long-term Assets ≥ 80%

Answer

Tier 2 Capital / Total Deposits ≥ 10%

Answer

Liquid Assets / Total Liabilities ≥ 25%

Question 3

What is the 'Fundamental Review of the Trading Book' (FRTB) under Basel IV?

Accepted Answer

A comprehensive revision to trading book capital rules replacing VaR with Expected Shortfall, imposing stricter boundary rules, and introducing desk-level model approval

Answer

A new accounting standard requiring fair value measurement for all trading book instruments

Answer

A review process where regulators audit trading books every three years

Answer

A mandatory stress test for banks with trading assets exceeding $50 billion

Question 4

What is 'Pillar 2' in the Basel framework?

Accepted Answer

The supervisory review process where regulators assess bank-specific risks not fully captured in Pillar 1 and can impose additional capital requirements

Answer

The minimum capital ratio requirement published in official Basel accords

Answer

The market discipline pillar requiring public disclosure of risk exposures

Answer

The liquidity risk framework including LCR and NSFR requirements

Question 5

What is 'Pillar 3' of the Basel framework?

Accepted Answer

Market discipline through mandatory public disclosure of capital, risk exposures, and risk management practices to enable external stakeholders to assess a bank's risk profile

Answer

The operational risk capital calculation methodology

Answer

The internal capital adequacy assessment process (ICAAP)

Answer

The supervisory stress testing framework conducted by central banks

Question 6

What does 'Tier 1 capital' consist of under Basel III?

Accepted Answer

Common Equity Tier 1 (CET1) plus Additional Tier 1 (AT1) instruments such as contingent convertible bonds (CoCos)

Answer

Only common equity (CET1), which includes retained earnings and paid-in capital

Answer

Subordinated debt, hybrid instruments, and general loan loss reserves

Answer

Total equity plus long-term senior unsecured debt