Basel Accords and Financial Market Regulation

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Questions and Answers

What is the year in which Basel I was introduced?

1988 (correct)

1985

1990

1992

Counterparty risk is a type of market risk.

False

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 _______________.

2012 Signup and view all the answers

Match the following risks with their definitions:

Credit Risk = The risk that the obligor of a financial instrument will fail to fulfill its obligation. Market Risk = The risk that the value of an investment will decrease due to changes in market conditions. Operational Risk = The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Liquidity Risk = The risk that a financial institution will not be able to meet its short-term obligations. Signup and view all the answers

What is the name of the framework that includes three pillars?

Basel's Three Pillar Approach Signup and view all the answers

Settlement risk is a type of liquidity risk.

True Signup and view all the answers

What is Basel IV?

Basel IV is the latest version of the Basel Accords, introduced in 2017. Signup and view all the answers

What type of risk is associated with the failure of a debtor to satisfy contractual obligations on time?

Credit risk Signup and view all the answers

Systemic risk is a type of business funding risk.

False Signup and view all the answers

What is the primary goal of banking supervision?

To ensure the safety and soundness of banks and the stability of the financial system Signup and view all the answers

The return on equity (ROE) of a bank is influenced by its level of _______________.

leverage Signup and view all the answers

Match the following risks with their definitions:

Credit risk = Risk of loss due to borrower default Price risk = Risk of loss due to changes in market prices Liquidity risk = Risk of inability to meet short-term obligations Signup and view all the answers

What is the primary role of regulators in the financial system?

To ensure financial stability and protect depositors Signup and view all the answers

Capital adequacy requirements are intended to ensure that banks have sufficient capital to absorb potential losses.

True Signup and view all the answers

What is the main objective of capital adequacy requirements?

To ensure that banks have sufficient capital to absorb potential losses Signup and view all the answers

What is the minimum percentage of Common Equity Tier 1 (CET-1) that a bank needs to hold according to Basel III?

4.5% Signup and view all the answers

The countercyclical buffer in Basel III can be imposed up to 5% CET-1.

False Signup and view all the answers

What is the main difference between Tier 1 and Tier 2 capital in Basel III?

Tier 1 capital is going concern capital, while Tier 2 capital is supplementary capital (gone concern capital). Signup and view all the answers

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.

30-day Signup and view all the answers

Match the following Basel III capital buffers with their descriptions:

Capital conservation buffer = 2.5% CET-1 Countercyclical buffer = up to 2.5% CET-1 SIFI buffer = 1% to 2.5% CET-1 Signup and view all the answers

What is the main goal of the absolute leverage ratio in Basel III?

To ensure banks have sufficient capital to meet minimum requirements Signup and view all the answers

Basel IV introduces changes that limit the reduction in capital that can result from banks' use of internal models.

True Signup and view all the answers

What was the main goal of the European Union project from 1983-1992?

Completion of the European internal market. Signup and view all the answers

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.

Basel Accords and Financial Market Regulation

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Questions and Answers

What is the year in which Basel I was introduced?

Counterparty risk is a type of market risk.

What is operational risk?

Basel III was introduced in the year _______________.

Match the following risks with their definitions:

What is the name of the framework that includes three pillars?

Settlement risk is a type of liquidity risk.

What is Basel IV?

What type of risk is associated with the failure of a debtor to satisfy contractual obligations on time?

Systemic risk is a type of business funding risk.

What is the primary goal of banking supervision?

The return on equity (ROE) of a bank is influenced by its level of _______________.

Match the following risks with their definitions:

What is the primary role of regulators in the financial system?

Capital adequacy requirements are intended to ensure that banks have sufficient capital to absorb potential losses.

What is the main objective of capital adequacy requirements?

What is the minimum percentage of Common Equity Tier 1 (CET-1) that a bank needs to hold according to Basel III?

The countercyclical buffer in Basel III can be imposed up to 5% CET-1.

What is the main difference between Tier 1 and Tier 2 capital in Basel III?

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.

Match the following Basel III capital buffers with their descriptions:

What is the main goal of the absolute leverage ratio in Basel III?

Basel IV introduces changes that limit the reduction in capital that can result from banks' use of internal models.

What was the main goal of the European Union project from 1983-1992?

Study Notes

Short History of Basel Accords

Basel Risk Classification

Credit Risk

Operational Risk

Basel's Three Pillar Approach

Capital Adequacy in Basel III

Basel III Capital Definitions

Liquidity Requirements in Basel III

European Union Projects

Studying That Suits You

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