Basel Norms and Risk Management

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Questions and Answers

Match the following risk management aspects with their corresponding description:

Risk assessment = Identifying and evaluating potential risks Risk reporting = Regular reporting to senior management and board of directors Risk management framework = Covering credit, market, operational, and liquidity risks Risk management culture = Promoting a robust risk management culture in banks

Match the following liquidity requirements with their corresponding description:

Liquidity Coverage Ratio (LCR) = Holding sufficient high-quality liquid assets to cover 30 days of net cash outflows Net Stable Funding Ratio (NSFR) = Maintaining a stable funding profile over a one-year horizon Liquidity risk = Risk of being unable to meet short-term financial obligations High-Quality Liquid Assets (HQLA) = Assets that can be easily converted to cash

Match the following capital adequacy ratios with their corresponding description:

Common Equity Tier 1 (CET1) capital ratio = Requiring at least 4.5% of risk-weighted assets in CET1 capital Total capital ratio = Requiring at least 10.5% of risk-weighted assets in tier 1 and tier 2 capital Capital conservation buffer = Buffer to absorb additional losses Countercyclical buffer = Buffer to mitigate against cyclical risks

Match the following bank supervision aspects with their corresponding description:

On-site inspections = Regular inspections to assess banks' risk management practices Off-site inspections = Remote monitoring of banks' risk management practices Corrective action = Supervisors' power to take action when necessary Comprehensive understanding = Supervisors' understanding of banks' risk management practices Signup and view all the answers

Match the following financial regulation aspects with their corresponding description:

Risk-based regulation = Regulation proportionate to the level of risk International cooperation = Essential for effective financial regulation Regulatory framework = Covers banking, securities, and insurance sectors Flexible regulation = Accommodating changing market conditions and risks Signup and view all the answers

Match the following Basel norms with their corresponding topic:

Risk management framework = Risk Management Liquidity Coverage Ratio (LCR) = Liquidity Requirements Common Equity Tier 1 (CET1) capital ratio = Capital Adequacy On-site inspections = Bank Supervision Signup and view all the answers

Match the following risk management aspects with their corresponding purpose:

Risk identification = To identify potential risks Risk assessment = To evaluate the likelihood and impact of risks Risk reporting = To inform senior management and the board of directors Risk management culture = To promote a robust risk management culture Signup and view all the answers

Match the following liquidity requirements with their corresponding purpose:

Liquidity Coverage Ratio (LCR) = To ensure banks can withstand short-term liquidity stress Net Stable Funding Ratio (NSFR) = To maintain a stable funding profile High-Quality Liquid Assets (HQLA) = To provide a buffer against liquidity stress Liquidity risk management = To manage and mitigate liquidity risks Signup and view all the answers

Match the following capital adequacy aspects with their corresponding purpose:

Capital conservation buffer = To absorb additional losses during times of stress Countercyclical buffer = To mitigate against cyclical risks Common Equity Tier 1 (CET1) capital ratio = To ensure banks have sufficient capital to absorb losses Total capital ratio = To ensure banks have sufficient tier 1 and tier 2 capital Signup and view all the answers

Match the following bank supervision aspects with their corresponding purpose:

On-site inspections = To assess banks' risk management practices Off-site inspections = To monitor banks' risk management practices remotely Corrective action = To take action when necessary to address risks Comprehensive understanding = To ensure supervisors have a thorough understanding of banks' risk management practices Signup and view all the answers

Study Notes

Risk Management

Basel norms aim to promote a robust risk management culture in banks
Banks are expected to identify, assess, and manage risks effectively
Risk management framework should cover credit risk, market risk, operational risk, and liquidity risk
Banks should have a comprehensive risk management strategy and policies
Regular risk assessment and reporting to senior management and board of directors

Liquidity Requirements

Basel III introduced liquidity coverage ratio (LCR) and net stable funding ratio (NSFR)
LCR requires banks to hold sufficient high-quality liquid assets (HQLA) to cover 30 days of net cash outflows
NSFR requires banks to maintain a stable funding profile over a one-year horizon
Liquidity requirements aim to ensure banks can withstand short-term liquidity stress
Monitoring and reporting of liquidity positions and risk

Capital Adequacy

Basel norms focus on capital adequacy to absorb potential losses
Basel III introduced common equity tier 1 (CET1) capital ratio
CET1 capital ratio requires banks to hold at least 4.5% of risk-weighted assets (RWAs) in CET1 capital
Total capital ratio requires banks to hold at least 10.5% of RWAs in tier 1 and tier 2 capital
Capital conservation buffer and countercyclical buffer introduced to absorb additional losses

Bank Supervision

Basel norms emphasize the importance of effective bank supervision
Supervisors should have a comprehensive understanding of banks' risk management practices
Supervisors should conduct regular on-site and off-site inspections
Supervisors should have the power to take corrective action when necessary
Supervisors should foster a culture of compliance and risk awareness

Financial Regulation

Basel norms aim to promote a stable and resilient financial system
Regulation should be risk-based, proportionate, and consistent
Regulatory framework should cover banking, securities, and insurance sectors
International cooperation and coordination essential for effective financial regulation
Regulation should be flexible to accommodate changing market conditions and risks

Risk Management

Basel norms aim to promote a robust risk management culture in banks, emphasizing identification, assessment, and management of risks.
Risk management framework should cover credit risk, market risk, operational risk, and liquidity risk.
Banks should have a comprehensive risk management strategy and policies, with regular risk assessment and reporting to senior management and board of directors.

Liquidity Requirements

Basel III introduced two key liquidity ratios: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
LCR requires banks to hold sufficient high-quality liquid assets (HQLA) to cover 30 days of net cash outflows.
NSFR requires banks to maintain a stable funding profile over a one-year horizon.
Liquidity requirements aim to ensure banks can withstand short-term liquidity stress, with monitoring and reporting of liquidity positions and risk.

Capital Adequacy

Basel norms focus on capital adequacy to absorb potential losses, with an emphasis on common equity tier 1 (CET1) capital ratio.
CET1 capital ratio requires banks to hold at least 4.5% of risk-weighted assets (RWAs) in CET1 capital.
Total capital ratio requires banks to hold at least 10.5% of RWAs in tier 1 and tier 2 capital.
Capital conservation buffer and countercyclical buffer introduced to absorb additional losses.

Bank Supervision

Basel norms emphasize the importance of effective bank supervision, with supervisors having a comprehensive understanding of banks' risk management practices.
Supervisors should conduct regular on-site and off-site inspections, with the power to take corrective action when necessary.
Supervisors should foster a culture of compliance and risk awareness.

Financial Regulation

Basel norms aim to promote a stable and resilient financial system, with regulation that is risk-based, proportionate, and consistent.
Regulatory framework should cover banking, securities, and insurance sectors.
International cooperation and coordination essential for effective financial regulation.
Regulation should be flexible to accommodate changing market conditions and risks.