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Questions and Answers
What is the year in which Basel I was introduced?
What is the year in which Basel I was introduced?
Counterparty risk is a type of market risk.
Counterparty risk is a type of market risk.
False
What is operational risk?
What is operational risk?
The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.
Basel III was introduced in the year _______________.
Basel III was introduced in the year _______________.
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Match the following risks with their definitions:
Match the following risks with their definitions:
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What is the name of the framework that includes three pillars?
What is the name of the framework that includes three pillars?
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Settlement risk is a type of liquidity risk.
Settlement risk is a type of liquidity risk.
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What is Basel IV?
What is Basel IV?
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What type of risk is associated with the failure of a debtor to satisfy contractual obligations on time?
What type of risk is associated with the failure of a debtor to satisfy contractual obligations on time?
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Systemic risk is a type of business funding risk.
Systemic risk is a type of business funding risk.
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What is the primary goal of banking supervision?
What is the primary goal of banking supervision?
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The return on equity (ROE) of a bank is influenced by its level of _______________.
The return on equity (ROE) of a bank is influenced by its level of _______________.
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Match the following risks with their definitions:
Match the following risks with their definitions:
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What is the primary role of regulators in the financial system?
What is the primary role of regulators in the financial system?
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Capital adequacy requirements are intended to ensure that banks have sufficient capital to absorb potential losses.
Capital adequacy requirements are intended to ensure that banks have sufficient capital to absorb potential losses.
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What is the main objective of capital adequacy requirements?
What is the main objective of capital adequacy requirements?
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What is the minimum percentage of Common Equity Tier 1 (CET-1) that a bank needs to hold according to Basel III?
What is the minimum percentage of Common Equity Tier 1 (CET-1) that a bank needs to hold according to Basel III?
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The countercyclical buffer in Basel III can be imposed up to 5% CET-1.
The countercyclical buffer in Basel III can be imposed up to 5% CET-1.
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What is the main difference between Tier 1 and Tier 2 capital in Basel III?
What is the main difference between Tier 1 and Tier 2 capital in Basel III?
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The liquidity coverage ratio is a liquidity requirement in Basel III that ensures banks have sufficient high-quality liquid assets to cover their net liquidity outflows over a ______________ period.
The liquidity coverage ratio is a liquidity requirement in Basel III that ensures banks have sufficient high-quality liquid assets to cover their net liquidity outflows over a ______________ period.
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Match the following Basel III capital buffers with their descriptions:
Match the following Basel III capital buffers with their descriptions:
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What is the main goal of the absolute leverage ratio in Basel III?
What is the main goal of the absolute leverage ratio in Basel III?
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Basel IV introduces changes that limit the reduction in capital that can result from banks' use of internal models.
Basel IV introduces changes that limit the reduction in capital that can result from banks' use of internal models.
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What was the main goal of the European Union project from 1983-1992?
What was the main goal of the European Union project from 1983-1992?
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Study Notes
Short History of Basel Accords
- 1988: Basel I introduced
- 1996: Amendment for market risk added
- 2004: Basel II introduced
- 2009: Basel 2.5 introduced
- 2012: Basel III introduced
- 2017: Basel IV introduced
Basel Risk Classification
- Credit risk: risk that obligor fails to fulfill obligations
- Market risk: risk of losses due to market fluctuations
- Operational risk: risk of losses due to internal processes, people, systems, or external events
- Liquidity risk: risk of inability to meet short-term financial obligations
Credit Risk
- Risk that obligor fails to fulfill obligations on due date or thereafter
- Includes counterparty risk and settlement risk
Operational Risk
- Encompasses all risks except credit and market risk
- Risk of direct or indirect loss due to internal processes, people, systems, or external events
Basel's Three Pillar Approach
- Pillar 1: minimum capital requirements
- Pillar 2: supervisory review process
- Pillar 3: market discipline
Capital Adequacy in Basel III
- Minimum capital requirements:
- 4.5% CET-1
- 6% Tier 1 capital
- 8% total capital
- Buffers:
- Capital conservation buffer: 2.5% CET-1
- Countercyclical buffer: up to 2.5% CET-1
- SIFI buffer: 1% to 2.5% CET-1
Basel III Capital Definitions
- Tier 1 capital: going concern capital (Common Equity Tier 1 and Additional Tier 1)
- Tier 2 capital: supplementary capital (gone concern capital)
Liquidity Requirements in Basel III
- Liquidity coverage ratio
- Net stable funding ratio
- ILAAP
European Union Projects
- 1957-1973: liberalisation of capital and service flows
- 1973-1983: harmonisation of national legislation
- 1983-1992: completion of European internal market
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Description
Learn about the evolution of financial market regulation, from Basel I to IV, and the different types of risk in financial markets.
