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P2.T7.405. Basel III regulatory capital changes

Nicole Seaman

Chief Admin Officer
Staff member
Describe reasons for the changes implemented through the Basel III framework. Describe changes to the regulatory capital framework, including changes to: The measurement, treatment, and calculation of Tier 1, Tier 2, and Tier 3 capital. Risk coverage, the use of stress tests, the treatment of counter-party risk with credit valuation adjustments, the use of external ratings, and the use of leverage ratios


405.1. Thrift Bank carries risk-weighted assets (RWA) of $100.0 billion. In regard to it's eligible regulatory capital, the bank holds:
  • $5.0 billion of Common Equity Tier 1 Capital ("Core Tier 1")
  • $2.0 billion of Additional Tier 1 Capital
  • $3.5 billion of Tier 2 Capital ("Gone concern")
Does Thrift Bank meet the Basel III capital requirements?

a. Yes, because its Total Capital Ratio of 10.5% is sufficient
b. No, because it does not hold enough Common Equity Capital
c. No, because its Tier 1 Capital Ratio is insufficient
d. No, because the bank has no buffer-quality capital to contribute to its Capital Conservation Buffer

405.2. Among its reforms in Basel III, the Committee introduced the following: "Banks will be subject to a capital charge for potential mark-to-market losses associated with a deterioration in the credit worthiness of a counterparty. While the Basel II standard covers the risk of a counterparty default, it does not address such risk, which during the financial crisis was a greater source of losses than those arising from outright defaults." To which risk capital charge does this refer?

a. Credit valuation adjustment (CVA)
b. Reliance on external credit ratings
c. Cliff effects arising from credit derivatives
d. Goodwill amortization

405.3. Compared to Basel II, which statement most accurately describes the treatment of external credit ratings in Basel III?

a. The Committee did not alter the role of external credit ratings from Basel II to Basel III, except to slightly increase their prominence in Basel III
b. The Committee eliminated references to IOSCO Code of Conduct Fundamentals for Credit Rating Agencies
c. The Committee eliminated the external credit assessment institution (ECAI) eligibility criteria
d. The Committee introduced several measures to mitigate the reliance on external ratings

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