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# P2.T7.404. Basel III capital ratios

#### Nicole Seaman

##### Chief Admin Officer
Staff member
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Define in the context of Basel II [and Basel III] and calculate where appropriate: Capital ratio, Capital charge, Tier 1 capital and its components, Tier 2 capital and its components, Tier 3 capital and its components, Probability of default (PD), Loss given default (LGD), Exposure at default (EAD), Maturity (M), Stress tests, Concentration risk and Residual risk

Questions:

404.1. In both Basel II and Basel III, the capital ratio is equal to eligible regulatory capital divided by risk-weighted assets; i.e., capital ratio = regulatory capital/RWA. In comparison to Basel II, each of the following is true about Basel III and its approach to regulatory capital, the numerator, EXCEPT which is not true?

a. Basel III increased the quantity and quality of regulatory capital required; for example, the predominant form of Tier 1 capital must be common shares and retained earnings
b. Whereas Basel II had divided Tier 2 into Upper and Lower tiers, Basel III simplified Tier 2 into a single "gone-concern" Tier 2 Capital
c. Basel III added a capital conservation buffer of 2.5% to regulatory capital and it must consist of Common Equity Tier 1 capital
d. Basel III added a Liquidity and Leverage Coverage (LLC) buffer of 3.0% to regulatory capital and they must consist of Common Equity Tier 1 capital

404.2. In updating the Basel II regulatory framework, the Committee asserted that Basel III introduced "a number of fundamental reforms to the international regulatory framework." Each of the following was a brand new introduction by Basel III (with respect to Basel II) EXCEPT which was not?

a. Liquidity ratios were newly introduced in Basel III
b. A leverage ratio was newly introduced in Basel III
c. A concentration in operational risk charge (CORC) was newly introduced in Basel III
d. A credit value adjustment (CVA) charge was newly introduced in Basel III

404.3. Thrift Bank carries risk-weighted assets (RWA) of $40.0 billion. In regard to it's eligible regulatory capital, the bank holds: •$2.8 billion of Common Equity Tier 1 Capital ("Core Tier 1")
• $0.2 billion of Additional Tier 1 Capital •$1.4 billion of Tier 2 Capital ("Gone concern")
Does Thrift Bank meet the Basel III capital requirements?

a. No, because Tier 1 Capital is not at least 8.5%
b. No, because Total Capital is not at least 10.5%
c. Yes, because Tier 1 is at least 4.0%
d. Yes, because Tier 2 is at least 2.5%

Answers here: