CRA Regulatory Capital Requirements 2 — Questions and Answers
Question 1: Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required of banks?
- 2.0%
- 4.5% (Correct answer)
- 6.0%
- 8.0%
Correct answer: 4.5%
Basel III requires banks to hold a minimum CET1 ratio of 4.5% of risk-weighted assets.
Question 2: Which Basel III buffer is designed to absorb losses during periods of excessive credit growth?
- Capital conservation buffer
- Countercyclical capital buffer (Correct answer)
- Systemic risk buffer
- Stress capital buffer
Correct answer: Countercyclical capital buffer
The countercyclical capital buffer (CCyB) is activated by national regulators during periods of excess credit growth to build resilience.
Question 3: What does the Supplementary Leverage Ratio (SLR) measure?
- Tier 1 capital relative to risk-weighted assets
- Tier 1 capital relative to total leverage exposure (Correct answer)
- CET1 capital relative to off-balance-sheet items
- Total capital relative to average total assets
Correct answer: Tier 1 capital relative to total leverage exposure
The SLR measures Tier 1 capital as a percentage of total leverage exposure, which includes both on- and off-balance-sheet items.
Question 4: A bank's Tier 1 capital is $10 billion and its risk-weighted assets are $125 billion. What is its Tier 1 capital ratio?
- 6.0%
- 7.5%
- 8.0% (Correct answer)
- 12.5%
Correct answer: 8.0%
Tier 1 capital ratio = $10B / $125B = 8.0%, which exceeds the 6% minimum requirement.
Question 5: Which of the following instruments qualifies as Additional Tier 1 (AT1) capital under Basel III?
- Retained earnings
- Common equity shares
- Contingent convertible bonds (CoCos) (Correct answer)
- Subordinated term debt maturing in 5 years
Correct answer: Contingent convertible bonds (CoCos)
CoCos that absorb losses by converting to equity or writing down qualify as AT1 capital under Basel III.
Question 6: Under the standardized approach, a residential mortgage loan with an LTV of 60% receives a risk weight of:
- 20%
- 35% (Correct answer)
- 50%
- 100%
Correct answer: 35%
Under the Basel standardized approach, well-secured residential mortgages typically receive a 35% risk weight.
Question 7: What is the primary purpose of the Net Stable Funding Ratio (NSFR)?
- Ensure banks hold enough liquid assets for a 30-day stress period
- Promote resilient longer-term funding structures over a one-year horizon (Correct answer)
- Limit interbank lending concentration
- Set minimum core deposit requirements
Correct answer: Promote resilient longer-term funding structures over a one-year horizon
The NSFR requires banks to maintain stable funding relative to illiquid assets over a one-year time horizon.
CRA Regulatory Capital Requirements 2
Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required of banks?