nayizhenfeng

 AIM 16: Describe the four principles of the Basel II Accord’s Second Pillar and describe specific issues that should be addressed as part of the supervisory review process.

 

1、James Haggerty is a bank supervisor responsible for the oversight of UrbanGroup, a large banking conglomerate. UrbanGroup determines its credit risk profile according to the foundation IRB approach and assesses operational risk according to the standardized approach as described in the Basel II Capital Accord. Which of the following are specific issues that should be addressed as part of Haggerty’s supervisory review process of UrbanGroup?

 

I. Review the bank’s internal control systems.

II. Check compliance with transparency requirements as described in Pillar 3 of the Basel II Accord.

III. Make sure that the bank is using LGD and EAD inputs for its retail exposures that are in compliance with supervisory estimates.

IV. Evaluate the impact of interest rate risk by assessing the impact of a 100 basis point interest rate shock to the bank’s capital position.

 

A) III and IV only.   

B) I, II, III, and IV.  

C) I and II only.   

D) I, II, and III only. 

nayizhenfeng

 

The correct answer is C

 

The supervisor’s duties as part of the supervisory review process include:

Check compliance with Pillars I and III of the Basel II Accord, which would include credit risk mitigation and transparency requirements.

Review internal control systems.

Assess internal capital management methods employed by the bank.

Assess risks not adequately addressed under Pillar 1.

Note that the IRB approach for retail exposures is distinct from other IRB approaches in that there is no foundation approach and that PD, LGD, and EAD estimates are all determined by the bank. Also, the impact of interest rate risk on the bank’s capital position must be assessed by determining the impact of a 200 basis point shock.

nayizhenfeng

 

2、To ensure minimal capital adequacy, Basel II suggests supervisors:

A) provide opportunities for increased dividend payments.  

B) restrict overly generous dividend payments. 

C) recommend sources of additional capital.  

D) reduce monitoring intensity.

nayizhenfeng

 

The correct answer is B

 

The supervisory review process suggests that supervisors restrict dividend payments to ensure minimal capital adequacy.

nayizhenfeng

 

3、The main purpose of the Basel II Accord’s Second Pillar is to ensure:

A) increased transparency for all banking system participants.  

B) that banks maintain an appropriate level of capital to cover market risks. 

C) that the internal review process appropriately assesses capital adequacy.  

D) competitive equality among internationally active bank holding companies.

nayizhenfeng

 

The correct answer is C

 

Pillar 2 is the Supervisory Review Process, which addresses the internal controls in place to assure capital adequacy.

nayizhenfeng

 

AIM 17: Discuss the purpose of the Third Pillar, and describe the procedures for addressing the concept of market discipline.

1、Market discipline is mainly addressed in Basel II through the disclosure mechanism of:

A) credit-risk exposures.  

B) proprietary banking operations.

C) timely and relevant banking operations and activities.  

D) competitive-sensitive internal operations.

nayizhenfeng

 

The correct answer is C

 

The purpose for addressing market discipline in Basel II is to benefit all financial market participants, banks, investors, and regulators of timely and relevant banking operations and activities while simultaneously recognizing the sensitivity of proprietary internal operations.

nayizhenfeng

 

2、Market discipline is mainly addressed in Basel II through the mechanism of the disclosure of:

A) all credit-risk exposures.   

B) proprietary banking operations. 

C) competitive-sensitive internal operations.

D) timely and relevant information about banking operations and activities. 

nayizhenfeng

 

The correct answer is D

 

The purpose of addressing market discipline in Basel II is to provide all financial market participants, banks, investors, and regulators with timely and relevant information on banking operations and activities while simultaneously recognizing the sensitivity of proprietary internal operations.