Financial Risk Management Regulatory Capital and Basel

Question 1

Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio requirement?

Accepted Answer

4.5%

Answer

2%

Answer

6%

Answer

8%

Question 2

What is the 'capital conservation buffer' under Basel III and what happens when a bank breaches it?

Accepted Answer

A 2.5% CET1 buffer above the 4.5% minimum; breaching it restricts dividend payments and discretionary bonuses

Answer

A 1% CET1 buffer; breaching it triggers immediate regulatory receivership

Answer

A 3% Tier 2 buffer; breaching it requires the bank to issue new equity within 30 days

Answer

A 1.5% Additional Tier 1 buffer; breaching it triggers automatic bail-in of subordinated debt

Question 3

What is the 'countercyclical capital buffer' (CCyB) under Basel III?

Accepted Answer

A variable buffer (0–2.5%) that national regulators increase during credit booms and release during downturns to dampen pro-cyclicality

Answer

A fixed 2.5% buffer held permanently by all systemically important banks

Answer

A buffer applied only to trading book market risk capital

Answer

A capital surcharge applied permanently to banks with more than $250 billion in assets

Question 4

What is the 'leverage ratio' under Basel III and what problem does it address?

Accepted Answer

Tier 1 capital / total exposure ≥ 3%; acts as a backstop against excessive leverage regardless of risk-weighting

Answer

Tier 1 capital / risk-weighted assets ≥ 6%; addresses credit concentration

Answer

Total capital / total deposits ≥ 10%; addresses liquidity risk

Answer

CET1 capital / off-balance-sheet items ≥ 5%; addresses shadow banking

Question 5

What does 'risk-weighted assets' (RWA) mean in the context of bank capital?

Accepted Answer

Bank assets adjusted by risk weights assigned to different exposure types, so riskier assets require more capital support

Answer

Total bank assets multiplied by a single 8% capital charge

Answer

The market value of assets in the trading book after haircuts

Answer

Total assets minus liabilities, adjusted for off-balance-sheet items

Question 6

What is a 'G-SIB surcharge' and which institutions are subject to it?

Accepted Answer

An additional CET1 capital buffer of 1–3.5% imposed on Global Systemically Important Banks based on their systemic importance score

Answer

A 1% capital surcharge applied to all FDIC-insured banks

Answer

A leverage surcharge applied to banks with more than $1 trillion in total assets

Answer

A liquidity surcharge requiring G-SIBs to hold 20% more HQLA than standard LCR requirements