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P2.T7.400 Basel Pillars

Nicole Seaman

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Describe the key elements of the three pillars of Basel II: Minimum capital requirements; Supervisory review; Market discipline. Describe the type of institutions that the Basel II Accord will be applied to. Describe the major risk categories covered by the Basel II Accord

Questions:

400.1 Each of the following is true about the Bank for International Settlements (BIS) and the Basel Committee EXCEPT which is false?

a. Over fifty central banks and monetary authorities are members of the BIS including (for example) authorities of China, the European Central Bank, Japan, Saudi Arabia, Russia, Singapore, and the United Kingdom
b. BIS hosts the Basel Committee on Banking Supervision (BCBS) who issues the Basel Capital Accords and who coordinates with supervisory standard setters from the insurance (IOSCO) and securities (IAIS) sectors by participation in the Joint Forum
c. The Basel Committee is the highest formal supranational supervisor authority such that its conclusions have legal force among member countries and respective supervisory authorities are expected to implement the Committee's regulations via statutory requirements
d. The Basel Committee issued the original Basel Capital Accord in 1988 (which covered only credit risk) and its 1996 Amendment (which added market risk); the Basel II Accord in 2004; and the Basel III framework in 2010


400.2. Which of the following best describes a key purpose of the Second Pillar in Basel II and III?

a. To provide quantitative criteria as a basis for allowing banks to employ their own internal risk models
b. To provide a means for additional capital requirements in order to cover material risks not effectively captured in the First Pillar
c. To incorporate market risk and operational risk requirements as a supplement to the First Pillar, which itself only covers credit risk
d. To expand on the definition of regulatory capital and therefore ensure a robust numerator in the capital ratio requirements


400.3. Basel II includes several non-standard approaches across the three major risk buckets, including internal ratings-based approach (IRB), internal models approach (IMA), and the advanced measurement approach (AMA). In comparison to standardized approaches, ceteris paribus, these internal approaches allow a bank to reduce its regulatory capital charge. Which of the following best explains how the Basel II framework handles this outcome?

a. Basel II anticipated an overall reduction below the (previous) 8.0% capital ratio, so it does not try to avoid the reduced capital charge
b. If the internal or advanced models approach produces a capital charge that is lower than under the standardized approach, it is discarded in favor of the higher charge under the standardized approach
c. In most cases the charge produced by the advanced or internal model is added to the charge produced by the standardized approach, ensuring there is not actually a reduction
d. Basel II requires increased disclosures under the Third Pillar, effectively exchanging trading greater transparency for internal reliance

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