Regulatory Capital Requirements Flashcards

Under Basel II/III's Internal Ratings-Based (IRB) approach, which parameter represents the proportion of exposure lost if a borrower defaults?

Answer: Loss Given Default (LGD)

LGD (Loss Given Default) measures the fraction of the exposure that the bank expects to lose after recovery efforts.

Global Systemically Important Banks (G-SIBs) are subject to an additional capital surcharge of up to:

Answer: 2.5%

G-SIBs face a CET1 surcharge ranging from 1.0% to 3.5%, with a 4.5% bucket reserved for future use, totaling up to 3.5% for most banks.

Which component of the Basel III framework specifically addresses the risk of excessive bank leverage during periods of growth?

Answer: Leverage Ratio

The Basel III Leverage Ratio (minimum 3%) acts as a backstop to risk-based capital measures, limiting excessive balance sheet leverage.

Under the standardized approach for credit risk, what risk weight is assigned to sovereign exposures rated AA- or better?

Answer: 0%

Sovereign exposures from countries rated AA- or better receive a 0% risk weight under the standardized approach.

Which Pillar of the Basel framework covers market discipline through public disclosure requirements?

Answer: Pillar 3

Pillar 3 of Basel requires banks to publicly disclose their risk exposures, capital adequacy, and risk management practices to enhance market discipline.

The capital conservation buffer of 2.5% under Basel III is composed of:

Answer: Common Equity Tier 1 capital only

The capital conservation buffer must be composed entirely of CET1 capital, making the combined CET1 minimum effectively 7% (4.5% + 2.5%).

In the context of operational risk capital, the Basic Indicator Approach (BIA) uses what metric as its basis?

Answer: Gross income averaged over three years

The BIA calculates operational risk capital as 15% of average annual gross income over the previous three years.