Regulatory Capital and Basel Flashcards
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Read the first 6 Regulatory Capital and Basel flashcards as text
What is the 'Liquidity Coverage Ratio' (LCR) under Basel III?
Answer: High Quality Liquid Assets / Net Cash Outflows over 30 days ≥ 100%
The LCR requires banks to hold enough High Quality Liquid Assets (HQLA) to survive a 30-day stress scenario of combined retail and wholesale funding outflows, ensuring short-term liquidity resilience.
What is the 'Net Stable Funding Ratio' (NSFR) under Basel III?
Answer: Available Stable Funding / Required Stable Funding ≥ 100%
The NSFR requires banks to fund long-term, illiquid assets with stable, long-term funding sources, addressing structural funding mismatches that contributed to the 2008 crisis.
What is the 'Fundamental Review of the Trading Book' (FRTB) under Basel IV?
Answer: A comprehensive revision to trading book capital rules replacing VaR with Expected Shortfall, imposing stricter boundary rules, and introducing desk-level model approval
FRTB (Basel IV) replaces 99% 10-day VaR with 97.5% ES, tightens the banking/trading book boundary to prevent regulatory arbitrage, and introduces granular desk-level internal model approval.
What is 'Pillar 2' in the Basel framework?
Answer: The supervisory review process where regulators assess bank-specific risks not fully captured in Pillar 1 and can impose additional capital requirements
Pillar 2 gives supervisors the authority to require banks to hold capital above the Pillar 1 minimum if their risk profile (concentration risk, interest rate risk in the banking book, etc.) warrants it.
What is 'Pillar 3' of the Basel framework?
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
Pillar 3 harnesses market forces by requiring standardized disclosures so that investors, analysts, and counterparties can compare bank risk profiles and discipline excessive risk-taking through pricing.
What does 'Tier 1 capital' consist of under Basel III?
Answer: Common Equity Tier 1 (CET1) plus Additional Tier 1 (AT1) instruments such as contingent convertible bonds (CoCos)
Tier 1 = CET1 (common shares + retained earnings) + AT1 (perpetual instruments with mandatory write-down or conversion triggers like CoCos); it forms the highest-quality going-concern capital.
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